What is income protection insurance?

Getting protection insurance might be low on your list of priorities, but it could be a lifesaver if you need to take time off work because of ill health. What is income protection insurance, and is it the right choice for you? Our guide is here to help.

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What is an income protection insurance policy?

If you're unable to work due to illness or injury, an income protection policy will pay you a regular income until you can go back to work or decide to retire. It's also known as permanent health insurance.

How does income protection insurance work?

Income protection policies are designed to provide a monthly payment while you're absent from work due to illness. Income protection insurance pays up to 70% of your usual monthly income, depending on your chosen policy. Your payments could start as early as four weeks from your first date of absence or up to two years later.

You might wonder why you can't claim 100% of your usual income. This is mainly because the payments are tax-free. If you pay the monthly premiums yourself, you'll already have paid income tax on the money, so you won't be taxed again. You will be taxed if your employer has provided the insurance as part of your employee benefits package. The monthly payment from your insurance is also lower as you may be entitled to sick pay or benefits.

Your payment start date can be fixed to start when your sick pay ends. Some employers support you with full sick pay for some time, while others will immediately put you onto statutory sick pay.

couple managing budget in the kitchen

Is income protection insurance right for you?

Here's what Which? had to say, ‘The one protection policy every working adult in the UK should consider is the very one most of us don’t have – income Protection.’

Income protection insurance covers up to 70% of your income when you cannot work due to ill health. Most of us would struggle to pay the bills if we had to take a significant pay cut because of illness or injury. However, it's also important to consider your options before you decide to buy income protection insurance.

Do you have savings?

If you have savings, you could rely on those to pay your bills during an absence from work. However, if your illness or injury ends up causing a lengthy absence from work, you may find that you go through your savings sooner than you might expect. It's important to have an alternative plan in place.

Do you already have income protection through another policy?

Some insurance policies include income protection coverage which pays out in specific circumstances. For example, you may have insurance as part of your mortgage that covers your mortgage repayments if you become ill. You may also have insurance that covers outstanding loans. Whilst you may still need income protection insurance to cover your other expenses, you may be able to choose a lower level of coverage and reduce your monthly premium.

Does your employer provide you with income protection cover?

Your employer may already provide you with income protection. However, you'll only benefit from this while they still employ you. It's still worth taking out your own policy so that you're covered even if you decide to change jobs.

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Benefits of taking out income protection insurance

An income protection insurance policy can provide you with long-term income protection that will pay out beyond the 28 weeks of statutory sick pay entitlement and for longer than other short-term income protection policies.

Paying the bills

Income protection insurance offers peace of mind, knowing that your mortgage, rent, and other essential outgoings are covered, even if you are away from work for more than a year.

Other loans and financial commitments

You may already have some form of insurance to pay the mortgage, payment protection insurance for car loans, or other hire purchase agreements. However, if you don't, your income protection policy can continue making the repayments, meaning you'll avoid defaulting or paying additional interest.

Maintaining your quality of life

Even if you experience ill health and are limited in your day-to-day activities, your quality of life is still important, and you can use your monthly payments to invest in the things you enjoy. If your illness or injury results in a disability, you'll also be able to pay for care or adaptations to your home.

You'll also be able to ensure that family life can carry on as usual. That could mean you can continue paying for your children's activities or provide financial support to older children.

How much does income protection insurance cost?

The cost of your monthly premiums depends on several different factors. Some are individual to you, and others relate to the policy terms.

Age

The older you are, the higher the risk you'll claim on the policy. That means that premiums will be higher as you get older.

Health

Your insurers will assess the risk that you'll make a claim before offering you a quote. That process includes asking for details of your medical history and any hereditary conditions affecting other family members. This may mean that they're unwilling to offer you insurance, or they may apply exclusions that mean you can't claim if you're away from work because of a pre-existing medical condition.

If you're in good health, your premiums will be lower.

Your occupation

If you work in a high-risk occupation, your premiums will be higher. What's classed as a dangerous occupation can differ depending on the insurer. It's a good idea to get a comparison quote to compare income protection insurance prices.

Lifestyle

Your lifestyle can impact your overall health and the likelihood that you'll be unable to work because of an injury. Insurers will look at health factors, including whether you're a smoker. Taking part in high-risk sports, such as rock climbing or deep sea diving, will also increase your premiums.

Waiting period

The waiting period is also known as the deferred period, the amount of time that you're prepared to wait between the start of your absence from work and when you want your policy to start paying. For example, you might receive full sick pay from your employer for a few months. Choosing a deferred period that matches that means your payments will start when your income drops. The longer the waiting time, the lower your premiums will be.

Definition of incapacity

Believe it or not, there are different definitions of what it means to be unable to work.

Own occupation

This type of cover pays out if you can't do your normal job. It's the most comprehensive cover available.

Suited occupation

There may be circumstances where you can't do your own job, but you could do something similar. For example, if you have a bad back, you might need to stop doing a job that involves heavy lifting. Suitable occupation cover wouldn't pay out if you could switch to a desk job instead.

Activities of daily living

This is the most basic level of coverage and is usually only recommended if you can't get any other income protection. It pays out if you're physically unable to do any work. Insurers look at your ability to do basic tasks such as walking, lifting, climbing or bending, as well as any other disability, such as visual impairment. Your policy will pay out if you can't do three of the listed tasks.

The level of cover you need

It stands to reason that the higher the income you need your policy to pay, the higher the cost.

You can calculate your needs by starting with your current take-home monthly pay, how much sick pay you'd receive during an absence and whether there are any benefits you could claim. It's also important to consider whether an insurance payout would affect any means-tested benefits you currently receive.

Consider how much you'll need to cover your monthly expenses during your absence from work. While you won't need to pay work-related costs such as travel expenses, you might incur other costs due to illness or simply because you're spending more time at home.

Index linking

When looking at the level of cover you're likely to need, it's also important to consider whether the payments will keep pace with any rise in the cost of living. Whilst this may not be relevant if you're only away from work for a short time, an extended absence may mean you struggle to pay the bills because your monthly payout doesn't have the same buying power.

If your policy is index-linked, your payments will increase with inflation; however, your premiums will also be higher.

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Common exclusions

You'll find exclusions with any insurance policy, and checking the small print to know what's covered before buying is essential. This is essential if you have any pre-existing health conditions, as they may be excluded from cover.

The exclusions on income protection insurance typically relate to medical conditions and the reason for your inability to work. UK-based insurers will also only cover UK residents, which means you can't get cover if you live and work abroad.

The most common exclusions are:

  • Self-inflicted injury
  • Alcohol or drug abuse
  • Straightforward pregnancy and childbirth
  • Failure to follow medical advice
  • HIV or AIDS
  • Injuries sustained in war
  • Injuries resulting from involvement in criminal activity.

Are there any alternatives to income protection cover?

There are other types of income protection insurance, but these differ from long-term income protection insurance. These are all distinct from life insurance which only pays a lump sum on death.

Accident, sickness and unemployment insurance

Accident sickness and unemployment cover (ASU) offers short-term income protection coverage that pays out up to 70% of your income for 12-24 months. It's cheaper than a long-term policy and will also pay out if you become unemployed or are made redundant, which income protection insurance doesn't.

The main disadvantages are that it will only be suitable if you are off work for a short time. Your insurance provider also won't take any health information when you take out the policy, so you could find your claim being rejected because of an exclusion you didn't know about upfront.

ASU cover is also likely to be a waste of money if you're self-employed. Exclusions on unemployment protection include any actions that terminate your employment; if you're your own boss, that choice will likely rest solely with you.

Critical illness insurance

Critical illness cover pays a lump sum if you're diagnosed with a serious illness. This can be ideal if you need to adapt your home or want a lump sum to invest in your family's future. Some insurance providers also allow you to add your children to your critical illness cover at no extra cost. That could enable you to take time off work to care for them.

The main disadvantages of critical illness cover are that it will only cover the most serious illnesses and usually only pays out once. If you recover and then have a reoccurrence later, you won't be able to claim again.

young woman holding her neck feeling pain

Get professional advice

MyTribe provides guidance and information to help you choose the right insurance cover for you. Contact us for a comparison quote, and we'll put you in touch with a regulated insurance broker who'll help you find the right policy.

Disclaimer: This information is general and what is best for you will depend on your personal circumstances. Please speak with a financial adviser or do your own research before making a decision.

Chris Steele
Cert CII (F1, IF7 & I10)
Founder and Editor

Chris is our resident private health insurance and healthcare expert and has over a decade's experience writing for and about private medical insurance and private treatment. He's a Cert CII qualified member of The Chartered Insurance Institute and his research and work are often cited in the press. Chris is also contributing writer to numerous other financial services publications.

Frequently Asked Questions

How much does income protection insurance pay?

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The monthly payment you receive will be equivalent to 50-70% of your salary.

My employer provides income protection - do I need my own policy?

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It's a good idea to have your own policy so you'll still be covered if you change jobs.

Do I have to pay tax on income protection payments?

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If you pay for your policy, you'll already have paid tax on your earnings, so your payout won't be taxed. If your employers pay your premiums, the payment will be taxed.

How long will income protection pay out?

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As long as you keep paying the premiums, your insurance policy will pay out for as long as you're off work or until you retire.

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