Income Protection Insurance

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CORONAVIRUS UPDATE

Due to the coronavirus outbreak, at the moment we’re unable to offer comparison for Unemployment cover, as currently all insurance providers are unable to offer policies. However, we’re still able to offer comparison for Accident and Sickness cover. To help answer any questions you might have, we’ve put together the latest information on coronavirus and income protection.

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 lost your job, income protection insurance could offer you and your family security. This is our guide to what you need to know.

What does an income protection insurance policy cover?

What you’re actually covered for depends on the type of income protection policy you take out. How long you’re covered for 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 from six to 12 months, although some policies will provide cover up to two years.
  • Long-term income protection 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 could provide you with a regular monthly income until you retire or the end of the policy term – whichever is sooner. Check with your provider to see the exact terms.

Income protection should not be confused with Payment Protection Insurance (PPI). PPI, notorious for being widely mis-sold in the past, 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.

What types of income protection are there? 

There are several types of income protection policy: 

  • Long-term income protection (LTIP) – previously known as Permanent Health Insurance, this is not to be confused with private health insurance, which covers medical costs. LTIP means you can protect a portion of your income – often half to two-thirds of your gross salary – if illness or an accident means you’re unable to work. Policies are generally designed to pay out until you reach retirement age, providing you with greater financial security

Find out more about long-term income protection insurance.

  • Accident and sickness cover (critical illness cover) – if you find yourself unable to work because of serious sickness or injury, this cover provides an alternative income for you to pay your monthly outgoings until you can return to work. Policies usually pay out for one or two years

See more information about sickness and injury cover

  • Unemployment cover – if you lose your job, this provides you with a steady replacement income. After a deferred period after leaving work (which can be adjusted in your policy), you’ll begin to receive a tax-free monthly income to replace your lost earnings

Find further 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, this 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.

What is full income protection insurance?

Full income protection provides you with a regular monthly income based on an agreed percentage of your earnings – usually 50% to 60% of your gross monthly income. Depending on your policy, this could last until you return to work, or if it’s a long-term policy, up until you retire or die. Some insurance providers may continue with partial payments until you’re able to return to full-time work.

Partial income protection

It could be that you’re able to return to work, but doing shorter hours than you were before you were injured or became ill. Depending on the type of cover you have, your insurance provider might continue to pay you a partial income until you return to work full-time.

If partial income protection is an option you’d like, check the terms and conditions before buying a policy to make sure it’s included.

How much does income protection cost?

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 - Simply put, the more you earn, the more you’re looking to cover, which means your protection repayments will be more expensive.
  • Job - The higher risk your job is considered, the higher your premiums are likely to be. Insurance providers tend to group jobs into four categories of risk. So, low-risk jobs like accountants and office workers would be in Class one, while high-risk jobs like builders and mechanics would be in Class four.
  • Monthly outgoings - If you have a mortgage to pay or other expensive bills, you’ll need more 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 too.
  • Marital status - If you have a spouse, civil partner and/or a family, you could have people who are financially dependent on you, meaning you need more cover.
  • Age - The older you are, the more likely you are to become ill or injured, meaning you’re a higher risk to your insurance provider. As you get older, you should expect to pay more for your monthly premiums.
  • Health - If you have pre-existing health conditions, you may be more vulnerable to severe illness that might force you out of work, meaning you’ll be more likely to make a claim. If you smoke, you should also expect to pay more, as you’ll be considered a higher risk.
  • Lifestyle - If you’re active, fit and healthy, this can be helpful. But if you take part in extreme or adventure sports, you’re more likely to be injured and need to make a claim.

Mubina Pirmohamed

From the Life team

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.”

Do you need income protection insurance?

Sickness, injury and redundancy can suddenly impact your income. These circumstances can quickly burn through any savings you’ve managed to build, with your mortgage or rent, utilities, food and travel still to pay. Income protection insurance could give you the security of a regular income so that, if something happens, your monthly outgoings are covered.

According to government figures, around one million workers take long-term sickness absence (LTSA) over the course of a year. 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 if you’re injured or become ill.

Even if you’re entitled to SSP and don’t have any dependents 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 is right for you, talk to an independent financial advisor. They can offer expert advice and take you through your options.

Frequently asked questions

How has the coronavirus pandemic affected income protection policies?

If you took out income protection insurance before the COVID-19 pandemic began, you should still be covered if you’re made unemployed or are seriously ill from coronavirus. However, you should check your policy wording, in case there are any listed exclusions. In most cases of COVID-19 though, illness is mild and you probably won’t need to rely on income protection insurance. You should be fine to take standard sick leave.

In terms of getting a new income protection insurance policy, we’re currently unable to offer comparison for unemployment cover, as some insurance providers aren’t offering policies. If you’re looking for accident and sickness cover, you should be able to find cover.

What’s the difference between permanent health insurance (PHI) and accident sickness and unemployment (ASU) cover?

There are a few differences:

PHI:

  • will cover you until retirement age
  • can be arranged to start when your employee sick pay stops
  • only covers you for accident or illness
  • may require a medical – depending on your health history

ASU:

  • designed to help cover salary lost through accident, illness or unemployment for a maximum set time - typically 12 or 24 months while you recover or find a new job
  • usually has a 30-day deferment period (the length of time you have to wait before pay-outs begin)
  • can include redundancy cover (in addition to accident or illness), although you often have to wait 90 days before you start receiving money
  • involves fewer health and lifestyle questions

Can I have more than one income protection policy?

Yes, you can. Because the policies are designed to help over different time periods and in different situations, having a combination of policies will offer the greatest protection – but you will be paying multiple premiums. For example, you may want ASU cover to protect you for redundancy and a PHI policy to cover you if illness or accident stops you working.

Remember, too, that every policy has a minimum claim period of 30 days. This means that if you’re not off work for a full 30 days, you can’t make a claim. Policies may also have an excess period. This is the time after you’ve been signed off work or become redundant that you won’t be covered for.

In some cases, the excess period will be nil, meaning you can claim back to day one, providing you’ve been off for the minimum claim period. But the whole of the minimum claim period has to elapse before you can be paid. This is the same for accident and sickness only, unemployment only and ASU policies.

If you’re employed, you want to take into account any benefits offered by your employer - like sickness benefit - when deciding on how much cover you need and what the excess should be.

If you’re self-employed, you’ll need to consider how long you can afford to wait before your policy kicks in when selecting your policy and excess period.

It’s also important to remember the maximum limits, which may be 50%-70% of your monthly salary, no matter how many policies you have.

Will having income protection insurance affect my sick pay?

Not at all. The idea is that the insurance policy takes over when your sick pay ends. If you fall ill, some employers will still pay your salary for a set period – sometimes for up to 12 months. Check how much your employer will give you and for how long.

The longer you receive a salary, the longer you can make your deferment period (the length of time you have to wait before pay-outs begin). Many policies won’t pay out if you’re still receiving a salary.

Can I get income protection if I’m self-employed?

If you’re self-employed, you won’t be entitled to typical employee benefits, like sick pay or redundancy pay, so income protection is something you should consider. It can give you the peace of mind that you’re financially protected if you’re unable to work.

Find out more about self-employed income protection.

How much of my income will it cover?

Income protection usually only covers part of what you earned before you were unable to work; typically, around 50 to 60% of your gross monthly income.

Can I get income protection on my passive income streams?

Passive income comes from an enterprise that a person isn’t actively involved in, like money earned from investing in shares. Some providers will include passive income as long as it’s directly related to your work activities. This could be in the form of dividends, bonus, commissions and benefits in kind. Make sure you read the policy terms and conditions, so you fully understand your insurance provider’s definition of ‘income’.

Does it 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?

It depends on the type of policy you get. 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 Prices Index (RPI).

Can you get income protection as a stay-at-home parent?

Yes, you can get income protection insurance if you’re a stay-at-home parent. Income protection insurance could be useful to cover the costs of childcare and essential household tasks, like cleaning and laundry, if you’re laid up for a while.

How long does income protection usually last?

Short-term income protection usually lasts between six to 12 months, although some policies will cover you for up to two years.

Long-term policies usually last for a minimum of five years, but can continue right up to retirement age or even for the rest of your life.

In both cases, before you take out a policy, you should check the details to make sure you’ll be covered for the time period you want.

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?

No. If you die, your income protection insurance will no longer be valid. If you have dependents 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.

Who doesn’t need income protection?

Not everyone needs income protection. It depends on your personal and financial situation. Here are some examples of people who might not need income protection:

  • You’re not the main breadwinner in your home – if you live with someone who has a secure enough job and salary to support the both of you, you might decide to only get income protection for their salary.
  • You can get by on your company’s sick pay – if you work somewhere that offers a good benefits package, you might decide it offers enough protection if you’re unable to work for a while.
  • You have enough savings – if you’ve been carefully saving over a long time, you might decide that you have enough to fall back on if you face time out of work. If that’s the case, you could bank and save the premiums you’d otherwise be paying.

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

Insurance providers may look at your credit file to make sure you’re telling the truth about who you are and where you live. If insurance providers need to access this information on your credit file, it will be a ‘soft search’ and won’t affect your credit score.

But if you have a poor credit rating, some insurance providers may not offer you income protection if they think you’ll have trouble with the repayments.

Just remember that if you have several debts, 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 repayments, even to protect your income, could lead you into further debt.

How can I compare income protection policies?

It’s easy to compare prices and different levels of cover with Compare the Market. 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. The insurance market is very competitive, so it’s a good idea to compare policies and prices to get the right cover at the right price.

Make sure you check the details of the policy, not just the price, as they all offer slightly different cover. How your provider defines an inability to work can also affect when they will pay out, so make sure you are clear about what this means for your policy.

What alternatives are there to income protection insurance?

The income protection cover that we offer isn’t the only option available to you. Here are a couple of alternatives to consider:

  • Mortgage payment protection – if you suddenly become unemployed, or are off work through sickness or injury, mortgage payment protection could cover the cost of your monthly mortgage payments.
  • Redundancy protection – similar to unemployment cover, redundancy protection is a form of insurance that helps you cover your monthly outgoings if you’re made redundant.

What do I need to get a quote?

Once you’ve chosen the type of income protection cover you want, we’ll ask you a few questions about:

  • your name, age and address
  • the type of job you do
  • whether you’re employed or self-employed
  • if you smoke or use nicotine-based products
  • the deferred period you choose
  • your health
  • the amount of cover you want, based on your monthly income

Once you’ve decided on a quote you’re happy with, just follow the link that will take you to the provider’s website.

Why use Compare the Market?

2 minutes
to get a quote**

92.4%
of users would recommend Compare the Market to friends or family***

**On average it can take less than 2 minutes to complete an income protection ASU quote through Compare the Market based on data in November 2020.

***For the period 1st March to 31st May 2021, 9,781 people responded to the recommend question. 9,033 responded with a score of 6 or above, therefore 92.4% are likely to recommend