Income protection insurance

Do I need income protection insurance?

Whether you need income protection insurance depends on your financial situation and personal circumstances.

Do you or others rely on your income to cover regular household bills? If so, an income protection policy could ensure your lifestyle remains unaffected if you’re unable to work.

Even if you’ve built up a pot of savings, you could quickly burn through it without a regular salary coming in, leaving you without anything to cover unexpected expenses.

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.

But you may not need income protection if:

• You already have income protection insurance as part of your work benefits.
• You have some form of illness cover through another insurance policy or even with your mortgage.
• You have savings to fall back on to cover everyday expenses if you’re unable to work.

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.

How much is income protection insurance?

The cost of income protection insurance in the UK can vary quite significantly due to several factors, including:

• Your age – the older you are when you take out the policy, the more you’re likely to pay. That’s because there’s a greater risk of you falling ill and needing to make a claim.
• Your job – the riskier your job is considered to be, the higher your premiums will be. Builders and mechanics are likely to pay more than accountants and office workers, for example. And be aware that different insurance providers may assess the same job differently in terms of risk.
• The length of cover – short-term policies are cheaper than long-term ones.
• Your lifestyle – if you smoke or have pre-existing health conditions, you may be more vulnerable to severe illness. This means you could be more likely to make a claim.
• The deferred period – the longer you can wait before you start to receive your replacement income, the cheaper your premium is likely to be.
• Your ability to do alternative work – income protection will cost more if you want to be covered for your specific role, rather than not being able to do alternative work.

What isn’t covered by income protection insurance?

Your income protection policy may exclude certain types of illness or injury: for example, self-harm.

What’s more, you might not be covered for certain pre-existing medical conditions and illnesses that run in the family. You may even be asked to pay more for your premium, but your provider should be clear about this.

Some policies also state that you can’t make a claim if your illness or injury doesn’t prevent you from doing other types of work, even if you have to give up your current job.

How much will I get from income protection insurance?

Income protection usually only covers a percentage of what you earned before you were unable to work. This is typically around 50% to 70% of your gross monthly income. This is because the income you get from the policy is tax-free.

When taking out a policy, you’ll usually have the option to link your income protection to a measure of inflation, such as the Retail Prices Index (RPI).

This helps to ensure any future payout you receive will remain in line with cost-of-living rises. But your premiums may also go up if you choose this option.