Facts & Details
Average Cost of Income Protection
How much does income protection insurance cost? Find out what affects the price and get a sense of what you might pay for this important cover.
LifeSearch
John RogersSenior CMS Editor
When you're off work due to illness or injury, your income protection insurance can be a financial lifeline, replacing a portion of your income while you recover. But one common question we hear is: 'do I need to pay tax on the money I receive from my income protection insurance?'
The answer depends on how your policy is set up, who pays for it, and how the premiums are treated for tax purposes. In this article, we'll discuss what is income protection insurance and what you need to know about the tax implications of your payments.
What is income protection insurance?
Income protection insurance (also known as income protection cover) is there to replace part of your earnings if you're unable to work due to illness or injury. It pays out a regular monthly income, typically up to around 50–70% of your usual salary, until you're well enough to return to work or until the end of your policy term.
It's also worth noting that income protection insurance for self-employed workers can be especially valuable, as they often don't have access to employer sick pay or company-funded schemes. This type of cover can help keep your business and personal finances afloat if you can't work for a period of time.
Unlike short-term sick pay or critical illness cover, income protection focuses on providing long-term, steady financial support. It's there to help you keep up with your essential bills, mortgage or rent, and everyday expenses while you focus on getting better.
The way your income protection payments are taxed depends on how the policy premiums are paid and who owns the policy.
If you pay for the policy out of your own money
If you pay the money yourself, the payment is taken from your income after it has been taxed, so any benefits you receive from the policy are paid tax-free. This is the most common setup for individual income protection policies, sometimes known as a 'personally funded policy'.
If your employer pays (for a company or group policy)
If you don’t pay the money yourself and your employer pays for the policy and claims tax relief, the payouts you receive are usually treated as taxable income, much like your salary. This means they'll be subject to income tax through PAYE. This can sometimes be referred to as an 'employer-funded policy'.
Navigating your income protection options
Whether you're reviewing the income protection cover you already have in place or considering taking out a new policy, it's important to understand your options and what to look for.
Determining if you're already covered
Before taking out a new policy, check whether you already have some form of income protection in place. Many employers include sick pay, group income protection, or other benefits within their employee package, so it's worth asking your HR department for details.
You might also have cover through another product, such as a mortgage protection policy. Reviewing your existing arrangements will help you avoid doubling up on cover and ensure you're protected in the areas that matter most.
Choosing between different income protection policies
If you're not already covered, or you want to enhance your protection, you'll find there are several types of income protection policies available. These can vary in how long they pay out for and how soon payments start.
Individual income protection policies give you more control and flexibility - for instance, letting you choose your level of cover, waiting period, and benefit term. Employer or group policies, meanwhile, can be simpler and more affordable, but may be less tailored to your personal needs.
Key factors to consider when selecting a policy
When comparing income protection options, think about:
- Your occupation and income: some jobs carry higher risks or have variable earnings, which can affect the cost and structure of your cover
- How long you could manage without income: Consider your savings, sick pay entitlements, and household expenses when choosing your deferment period (how soon payments start after you stop working).
- Length of cover: Decide whether you want short-term protection (for a set number of years) or long-term cover that lasts until retirement age.
- Premium type: Some policies have guaranteed premiums that stay the same, while others are reviewable and may increase over time.
- Level of benefit: Check how much of your income the policy will replace - most policies cover between 50% and 70% of your gross earnings.
Making the right choice for your future
Understanding how income protection and tax work together helps you make confident decisions about your financial security. If you're unsure about your current cover, need help finding the right income protection quotes, or simply would like more information about finding protection that's right for you, speak to a LifeSearch adviser today.
Understand your cover options
An expert LifeSearch adviser can answer your questions, explain what options are available and provide fee-free quotes so you know what's right for you.
John RogersSenior CMS Editor
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