Income protection insurance

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What is income protection insurance?

Income protection insurance offers a replacement income if you’re unable to work, usually due to illness or injury. There are several types of income protection insurance, offering short and long-term cover. 

If you’re worried about what might happen if you become ill or lose your job, income protection insurance could offer you and your family security. This is our guide to what you need to know.

Do I need income protection insurance?

To answer that, you have to ask yourself whether you could cope financially if you were to lose your income through sickness or injury. Without a regular salary, you could quickly burn through your savings, with your mortgage or rent, utilities, food and travel still to pay for. Income protection insurance could give you the security of a regular income to cover your monthly outgoings.

If you’re self-employed, or you’re employed but only have statutory sick pay (SSP) to fall back on, income protection could offer a vital safety net. Learn more about self employed income protection.

Even if you’re entitled to SSP and don’t have any dependants to worry about, think of it this way – if an accident or illness means you won’t be able to pay your bills, then some form of income protection insurance is definitely worth considering.

If you’re not sure whether income protection insurance is right for you, talk to an independent financial adviser. They can offer expert advice and take you through your options.

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What does an income protection insurance policy cover?

What you’re covered for depends on the type of income protection insurance policy you take out. How long you’re covered for (the policy ‘term’) also depends on the type of policy and insurance provider you choose.

  • Short-term income protection can cover you for accident, sickness and unemployment if you’re unable to work for a short period of time; for example, if you break your leg or are made redundant. Policies typically cover you for one or two years.
  • Long-term income protection, also known as permanent health insurance (PHI), will cover you against accident and sickness if you become seriously ill or permanently disabled. It won’t cover unemployment. If you’re unable to work again, long-term income protection insurance could provide you with a regular monthly income until you retire or the policy term ends – whichever is sooner. Check with your provider to see the exact terms.

Income protection insurance shouldn’t be confused with Payment Protection Insurance (PPI). PPI only covers a specific debt if you’re unable to work because of injury, illness or unemployment. For example, it could cover your credit card, mortgage or loan repayments. Income protection gives you a tax-free monthly income that you can use as you would your regular income.

Types of income protection insurance

There are several types of income protection policy: 

  • Accident and sickness cover (critical illness cover) – if you find yourself unable to work because of serious sickness or injury, this provides an alternative income to pay your monthly outgoings until you can return to work. See more information about sickness and injury cover.
  • Unemployment cover – if you lose your job, this gives you a steady replacement income. After a deferred period, which is the length of time you have to wait before pay-outs begin, you’ll receive a tax-free monthly income to replace your lost earnings. Find more details about unemployment insurance.
  • Accident, Sickness and Unemployment (ASU) cover – a combination of the above, in the event of illness, an accident or job loss. It allows you to protect the payments on your mortgage or rent, plus any other debts. You can also access some extra income. Get more information about ASU.

How does income protection insurance work?

Income protection typically covers around 50% to 70% of your gross monthly income. Some policies will include income earned from work-related dividends, bonuses and commissions, as well as salary, but check the policy details. 

If you’re able to return to work but are working fewer hours than before you were injured or became ill, your insurance provider might continue to pay you a partial income until you return to work full-time. Again, check your policy for details.

Policies come with a waiting or deferred period – the amount of time between you falling ill and when you can claim. This is usually at least one month. The longer the waiting period, the cheaper your policy will be.

If you’re entitled to SSP, you can claim it and claim on your income protection policy at the same time. But the general idea is that the insurance policy takes over when your sick pay ends.

How much is income protection insurance? 

This really depends on your personal situation and the insurance policy you choose. There are many things that could affect the cost of your income protection insurance. Here are some examples: 

  • Salary – put simply, the more you earn, the more you’re looking to cover, which means your protection repayments will be more expensive.
  • Job – the riskier your job is considered, the higher your premiums are likely to be. Builders and mechanics are likely to pay more than accountants and office workers, for example.
  • Monthly outgoings – you’ll need sufficient cover to pay your existing bills if you’re unable to work.
  • Debts - if you have outstanding loans, credit or other debts, you’ll need enough cover to pay these costs.
  • Marital status - if you have a spouse, civil partner and/or a family who are financially dependent on you, you may need more cover. 
  • Age - as you get older, you should expect to pay more for your monthly premiums.
  • Health - if you have pre-existing health conditions, you could be more likely to make a claim and so should expect to pay more.
  • Lifestyle - if you take part in extreme or adventure sports, you’re more likely to be injured and need to make a claim.

Frequently asked questions

Does income protection pay out if I lose my job?

If you have short-term income protection, unemployment insurance or a bundled ASU policy, you should receive a pay-out if you lose your job. 

However, you won’t be able to claim if you buy a policy after your redundancy has been announced. It’s also very unlikely you’ll receive a pay-out if you take voluntary redundancy.
Check the terms and conditions before you buy to make sure you’d qualify for unemployment protection.

Do I need to reapply for income protection if I change jobs?

You’ll be able to keep the same policy if you change jobs, but you should let your insurance provider know. If your new job is considered a higher or lower risk, the cost of your premiums could go up or down. 

Also bear in mind that if your salary goes up, you may want to increase your cover amount. On the other hand, if your new role comes with a generous sick pay benefit, you might want to decrease the level of cover.

Does my income protection increase when my salary increases?

Some insurance providers offer the choice of an ‘increasing cover’ policy, which increases the amount of benefit you get in line with your salary.

You can typically choose between: 

  • Fixed increase cover – your benefit automatically increases every year by a fixed percentage. Be aware that the cost of your premiums will also go up.
  • Index-linked increasing cover – your benefit automatically goes up every year in line with inflation. Your premiums will also increase each year, usually at a slightly higher rate than the Retail Price Index (RPI).

What is an exclusion or excess period in redundancy cover?

All unemployment policies have an initial exclusion period. This is a 90- to 120-day period, depending on the insurance provider, in which you’re unable to make a claim. This is to safeguard the provider against people taking out a policy when they’re aware they’ll be made redundant in the near future.

Does income protection insurance pay out if I die?

If you die, your income protection insurance will no longer be valid. If you have dependants who rely on your income, you may also want to consider taking out life insurance. This will give your family financial protection if you die while the policy is running.

Find out more about when to get life insurance.

Does income protection cover my mortgage?

Income protection gives you a replacement income; mortgage protection insurance is specifically designed to cover mortgage repayments. When you get a quote with us, we’ll ask you whether you’re looking to cover your income or your mortgage.

Can I get income protection insurance if I have a bad credit rating?

If you have a poor credit rating, some insurance providers may not offer you income protection, as they may think you’ll struggle to pay your premiums.

Also remember that income protection is only designed to cover your regular income. If you’re already in debt, it could help to pay off what you owe but won’t necessarily be enough to pay off all of your debts. Taking on more payments, even to protect your income, could lead you into further debt.

Author image Mubina Pirmohamed

What our expert says...

“It’s vital that you’re honest about your medical history and give your insurance provider the information they ask for. It could be the difference between a successful claim or no pay out.”

- Mubina Pirmohamed, Insurance expert

What do I need to get a quote?

Once you’ve chosen the type of income protection cover you want, you’ll need to give us the following information:

  • Your name, age and address
  • The type of job you do
  • Whether you’re employed or self-employed
  • Your annual income before tax
  • The deferred period you choose
  • The amount of cover you want, based on your monthly income.
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Compare income protection 

It’s easy to compare prices and different levels of cover with Comparethemarket. Just use our income protection comparison service and fill in your details and what cover you’re interested in. It only takes a few minutes to see what quotes are available to you.

Page last reviewed on 01/09/2022
by Mubina Pirmohamed