Do I need income protection?

Do I need income protection?

13 May 2022

Do I need income protection?

What is income protection?

Income protection is there to replace the majority of your wages if you're ever signed off work by a GP due to injury or sickness.

In most cases, income protection pays monthly to the tune of 50-70% of your wage for as long as you need. Income protection means a reliable and consistent wage keeps coming. It means continuing to meet your major financial commitments without smashing your savings or overly sacrificing the lifestyle you're used to.

How does income protection insurance work?

Like any other protection or life insurance product, you can choose an income protection policy that fits your circumstances and budget. In fact, it pays to get advice to figure out what you actually need from any life insurance product - there's no shortage of options and policies out there.

We'll break down income protection into five decisions you'll need to think about:
  1. Cover Level - basically what percentage of your wage/ how much cash do you want coming in each month? 50-70% is typical.

  2. Cover term - how long do you want your income protection policy to last? It might be two years, five, ten or even 25 years. You may want cover to last until retirement age.

  3. Benefit term - how long would you want income protection payments to keep coming if you're off work? You can select anything from a year, two, or decades so you're covered until retirement.

  4. Deferred period - when would you want your income protection payments to start? This is a crucial one. Most likely you'd want payment to start in line with your employer sick pay agreement. If you aren't entitled to sick pay you'll probably want payment to start straight away (although the minimum deferred period is usually four weeks). If you get employer sick pay for six months then you'll probably want your deferred period to be six months.

  5. Definition of incapacity - what kind of sickness and/ or injury would mean you, specifically you, couldn't do your job? Person to person it's not the same: a writer who breaks a leg can still work, a builder who breaks a leg can't. Most insurers use the definition 'own occupation', which means that if you can't do your current job you qualify to start receiving the benefit. Some insurers are stricter and say 'any occupation', AKA you'd need to be unable to do any job to claim successfully.

Do I need income protection insurance?

Here's a quick test: ask yourself what'd happen to your lifestyle, your household, and any dependents you have if your wage stopped (and stayed stopped) for a prolonged period of time.

If the answer's 'not a lot' then it may not be for you. If you're near retirement with some savings and no dependents, for example, it could make more sense to just ride an illness out until your pension kicks in.

Your employer might offer generous sick pay but do bear in mind that it will expire eventually, whether it's after six months, nine months, a year or two. The minimum a company is required to pay to sick or laid up employees is the government's Statutory Sick Pay - £99.35 per week and it lasts for a max of 28 weeks.

What are the main reasons why I may need income protection?

Really, you have to think what if. People are more likely to plan for, or at least think about, life's big ticket events: hatches, matches and dispatches. We're more likely to fear and anticipate major illnesses but not so much suffering things that are much more common or likely: stress, for example, or a bad back. Broken legs or depression.

Compared with other policies, income protection is a relatively low-cost way to ensure sickness or injury doesn't stop your wages ... even if it stops you working.

Let's agree that, post-covid, we're in an era of belt-tightening. Employee benefits aren't as generous as they once were and the financial climate is fairly volatile. Income protection can't stop you getting sick or injured, but it can ensure your lifestyle, and that of any dependents you have, can be maintained if you're unable to go to work for a decent stretch of time.

Protecting my income if I fall ill

What can I ask from my employer?

The first thing to do is to understand your current sick pay agreement. Beyond that, it's also worth asking an employer or HR department if there are any extra provisions, formal or informal, that would help to support sick employees.

If not, or you feel your employer agreement is lacking, you can lobby for greater protection but, really, much of an employer's duty-of-care is at their discretion. Your employer may be obliged to only pay Statutory Sick Pay of (currently) £99.35.

What can I get from the government?

We can't be exhaustive here as there are too many variables, but in general terms a long term sickness / inability to work may qualify you for ESA or Employment Support Allowance. How much you'll get in ESA depends on your age, financial position and the likelihood of you returning to work some time in future. If your sickness or health condition is classed as a disability that opens up more state benefits.

One thing that's standardised, however, is that claims take up to 13 weeks (or longer: as was the case during 2020 and 2021) to process. During that time payment is capped at £61.05 for under 25s, and £77.00 for over 25s. How much you can claim after you've been processed varies, but someone intending to return to work at some point can expect to receive £77.00 per week. To understand what other benefits may be available, the government website is the best place to go.

Unable to work for 2 months

A 35-year-old female has a 41% chance of being off work sick for two months. It's not insignificant. Let's assume you're forced off work for two months because of sickness. How that will impact you and your life depends on a few key variables.

If you're covered by some kind of company sick pay (100% or 50% of your wage) for that time, you're in a better spot than many others. Self-employed, gig economy, zero hours and agency workers often have no sick pay or benefits to fall back on.

If you have some cash saved then that's an option, but you're one of the lucky ones. Data differs on the subject, but it was reported in 2021 that one in four Brits have less than £500 in savings. A further one in five have less than £100 and 7% of Brits have nothing saved at all.

What can I ask from my employer?

Ask what your sick pay entitlement is and look into the small print to see exactly what pay you'd get, for how long, and what exclusions there are. AKA what your company will not cover you for.

What can I get from the government?

It depends on your situation: how sick you are and how long you'll be off. Statutory Sick Pay, if you're entitled to it, is £96.35 per week for up to 28 weeks. Other benefits may be open to you if you have more serious health conditions but it's unlikely government benefits will come close to matching your income before you got sick.

For more information it's best to drill into this part of the government website.

But do I really need income protection insurance?

  • I won't fall ill

We hope that's true. But we'll have to hit you with some stats: as many as one million UK workers find themselves off work sick each year and around 250,000 people leave employment each year due to ill health; that's roughly 1% of the entire UK workforce and around 60% of these are the main household breadwinner.

As of Q4 2021, an estimated one third (33.6%) of the UK labour force was suffering from long-term health issues, which is 3.5% higher than it was five years ago. Statistically, you're several times more likely to get sick and need time off work than you are to die before retirement age.

  • I can use my savings

Absolutely you could. But income protection exists so you don't have to. You weren't saving all that rainy day money to cover everyday costs, you saved it to do something meaningful with it. With income protection you don't need to mess too dramatically with your bigger plans and financial goals.

  • My employer will support me
Again we hope that's true, but your employer is responsible for supporting you financially only as specified in your contract, assuming you have one. If they go above and beyond to support you - awesome, you have an employer worth sticking with. But they're not obliged or compelled to do any more than what's written in the small print.
  • I already have illness insurance
Great. Truly, great. Some insurance policies cover illness without specifically covering income or employment. With that, income protection and other life insurance products work very well side-by-side: together covering all health bases.

Read more about the differences between income protection and critical illness cover.
  • I don't have a family that depends on me financially
But you have you who depends on you financially. Everyone has overheads and commitments regardless of family status or size. Renters have to make rent, home owners have to make mortgage payments and we all have to eat.

No matter how many people you're responsible for, or that you support, you (singular or plural) have gotten used to a certain level of lifestyle and maybe even comfort. Income protection means continuing to live, to a large extent, in the lifestyle you've built.

Does income protection cover redundancy or if I get fired?

It doesn't. There are insurance policies for that but income protection covers health-related absence from work.

Read more here - Does Income Protection Cover Redundancy?

What you need to think about before you take out income protection insurance:

Think about;

  • How you'd pay your bills if you stopped earning.
  • Your budget and what you can afford to pay in monthly premiums.
  • Your employer sick pay and benefit entitlements, what they are and how long they last.
  • The wider financial repercussions of you being unable to earn for a prolonged period of time.

In some ways income protection is kind of counter intuitive. It may feel like an unnecessary expense but it's more of a foundation: an overhead that ensures your life and lifestyle will - should the unforeseen happen - continue with a sense of order and normality. It's one of those products you hope you'll never need but you'll be glad it's there if you do.

How much income protection insurance do I need?

Income protection pays out a percentage of your wage, and your profile, health monthly premium cost will reflect that. If you're a high earner, then insuring 50-70% of your wages will mean higher premiums than a lower or average earner.

Beyond that, one policy is enough. If you take advice and mould policy specifications to your life and circumstances you'll have this base comfortably covered.

When does income protection insurance pay out?

It pays out when you claim, assuming - and proof will be required - you cannot work as a result of sickness or injury.

When monthly payments start hitting your bank account is, as you read earlier, decided by you when you take out your policy. The minimum is usually after four weeks, but you'll probably want to pick when payments start in line with your employer sick pay/ benefits (if you have 'em).

How long does income protection pay for?

You decide the 'benefit term' when choosing your policy. You set payments to continue for a year, two, five or until retirement.

Say you specify a 'benefit term' of 25 years and you get sick or injured to the extent you can't work. Payments will stop when a) you're fit to return to work b) the policy expires (after 25 years) or c) you pass away during this time.

How many times can I claim income protection?

Unlike critical illness cover, you can claim on income protection multiple times. In each instance of a claim, regular payments keep coming until you're back at work, or until you retire, or until your claim period ends, or until you pass away.

What does income protection not cover?

It doesn't cover death, redundancy or if you're fired from your job. Other policies are available to cover such outcomes, but income protection is specifically designed to cover wages when sickness or illness strikes. Given the time income protection keeps paying for, it's much more generous than other protection policies centred on incomes and jobs.

How much does income protection insurance cost?

Income protection costs vary as it depends on a number of factors:

  • Age
  • Occupation
  • Smoker status
  • Health
  • Hazardous hobbies
  • The percentage of income being covered
  • The deferred period
  • The policy length
  • And so on

But as an example, a healthy 25-year-old female, non-smoker, who works as a teacher, chef or counsellor will pay somewhere between £10 and £13 per month.

If the same person's a taxi driver there's a slight risk increase that comes with driving all day so we'd expect a price of £15-£17 per month.

What are other kinds of income protection I might need to know about?

There are other policy types that loosely come under the income protection umbrella. Redundancy cover exists, and there's a whole suite of professional income protection products designed around the needs of the self-employed, business owners and company directors. See our business protection page for more.

Income protection plan for the self employed

Income protection if you're self-employed can be especially worthwhile. Self-employed workers often go without the same protections (in terms of sick pay and benefits) as PAYE employees so a policy to cover wages in the event of sickness or injury makes sense.

If you are self-employed, play the tape forward and think about how and what you'd earn - and how your company/ business would fare - if you were physically limited. Would you be able to outsource work (and lose profit)? Could you fulfil the demands of your business / clients? Would you lose momentum?

Income protection can, in some cases, be bought through a business; which offers some tax benefits. There's a whole suite of products available to protect self-employed / company directors' incomes, and to protect your company/ business from the impact of key people going down. See our income protection for the self employed page for more.

Income protection plan for the contractors

Many contractors don't have the same protections (sickness benefits etc) as PAYE employees so income protection is a viable way to build a base layer of financial protection.

If you're a contractor, income protection can mean protecting earnings for the rest of your working life. That way, any prolonged periods of sickness or injury won't overly compromise your overall financial health.

Income protection plan for Doctors

If you've worked as an NHS doctor for five years or more your sick pay entitlement is comparatively generous. But if you're in your first year as an NHS doctor, sick pay is likely to be one month full pay and two months half pay. Locum doctors and GPs may not be entitled to anything.

And we recommend medics get advice before exploring income protection. Some insurers have special concessions, benefits and tailored income protection packages ready for you.

Income protection plan for Nurses

Income protection is just as relevant for nurses, or medics in general, as for most other occupations. While NHS sick pay benefits are more generous than most, there are still limits and being off work sick, stressed or injured is not uncommon for those in front line health jobs.

But get advice before buying. There are special and tailored income protection packages out there for those who work in medical professions.

How to claim income protection insurance

You'll need to be signed off sick by a GP before you can file a claim with your insurer. And the insurer will probably ask for evidence (employer/ medical reports) of your situation.

Here are some of the common steps associated with making an income protection claim.

Life insurance exists to protect you. And no two people are the same. The best policy for you depends on where you are, what's going on at home, your health, your plans, your needs and your budget.

LifeSearch work with a wide range of top insurers so we can find perfect protection for unique you.

Reach out and we can start you on your journey.

LifeSearch compare quotes from all major UK insurers. Advice offered is free and all quotes given are without obligation. LifeSearch Limited is an Appointed Representative of LifeSearch Partners Limited, who are authorised and regulated by the Financial Conduct Authority. Calls may be monitored/recorded.

*Prices where indicated in adverts are based on the below criteria, as of 02/02/2022. Prices quoted may vary depending on your own individual circumstances including age, medical history, the sum assured, length of policy - and other variables.

Life Insurance from £5 per month:
29 year old female client- non-smoker- level term assurance £106,541 over 25 years- £5pm

Family Income Benefit from £5 per month:
31 year old Male client- non-smoker- looking at £700 to be paid each month over 20 year term - £5pm  

Critical Illness Cover from £10 per month:
25 year old male client- non-smoker- level term critical illness £54,046 over 20 year term- £10pm

Mortgage Protection Insurance from £5 per month:
35 year old female client – non-smoker- decreasing £80,000 over 35 year term- £5.22

Income Protection Insurance from £10 per month:
25 year old male client- non-smoker- admin assistant- 3 month deferment period- £1428  to be paid out each month for a maximum of two years per individual claim- covering him up to the age of 68- £10pm  

Over 50s Insurance from £10 per month:
50 year old male client- non-smoker- over 50’s plan to pay out £3,264 for £10pm
65 year old male client- non-smoker- over 50’s plan to pay out £1,853 for £10pm 

Joint Life Insurance from £5 per month:
29 year old male and female - non-smokers - Joint Level term life insurance to pay out £53,094 over 20 years- £5pm 

Let us get to know you and do the hard work for you

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LifeSearch Limited is an Appointed Representative of LifeSearch Partners Limited, who are authorised and regulated by the Financial Conduct Authority. Calls may be monitored/recorded.