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Income protection insurance
Income protection insurance replaces some of your monthly income if you are unable to work due to illness or injury. It pays you a tax-free monthly income until you return to work, you retire, or your policy expires.
This type of cover is designed to support you and your family by covering your regular outgoings, to help maintain your lifestyle, should something unexpected happen.
Think about your current sick pay
- If you're employed, you might have a better arrangement through your employer, but there'll most likely be an expiry date on their support - your employer can also change their terms of sick pay at any time.
- It's worth thinking about the fact that you might change jobs in the future...what if you new employer doesn't have as comprehensive cover as you do now? You'll also be older, which will mean that getting cover independently will be more costly. The default sickness cover in the UK is Statutory Sick Pay (SSP), which pays just over £100 a week for a maximum of half a year. It’s not much.
- You might be self-employed and not have such a luxury as sick pay. Income protection can help create a financial safety net and peace of mind.
Why income protection?
We believe everyone should at least consider income protection. Whether you’re young and renting, or have a mortgage and a family, your income is probably the foundation on which life happens and life grows.
If the cashflow suddenly stops as a result of sudden injury or ill health it can put us, our finances, our plans, and the people we care about on the back foot.
How does income protection insurance work?
Once you’ve decided that you need income protection insurance, there are five main choices that you’ll need to make:
- Cover level: The amount of benefit you’ll receive each month. You can choose the right level for you, but typically it’s up to 60% of your gross monthly income.
- Cover term: How long you’d like to be protected for. This is usually a fixed number of years, say 25, or however many years you think you’ll be in full-time employment.
- Benefit term: How long the insurance benefit will be paid if you’re ill and unable to work. Many people want the money to continue until retirement, but you can pick say two or five years if that’s all you need.
- Deferred period: How long after you’ve stopped working that you’d like the income protection insurance benefit to start. This product feature can sometimes be a bit confusing, but often people don’t need their insurance to start paying straight away, particularly if they’re employed and they receive sick-pay for a period of time. If you're self-employed however, you might need a short deferred periods as you won’t have financial support from an employer.
- Definition of incapacity: This is what qualifies you to start receiving your income protection insurance benefit. The definition that most insurers offer, and probably the simplest, is called ‘own occupation’, which means that if you are ill and can’t do your current job you qualify to start receiving the benefit. Some insurers also offer slightly stricter definitions, like ‘any occupation’, which means that to qualify for your insurance benefit you must not be able to do your current job, or any job at all, if you fall ill.
Income protection insurance is an extremely useful product for many people, but it can be a little confusing. Request a call back from one of our friendly advisers, who are experts in income protection insurance and will happily take you through the five steps above to work out what cover you need. You can also read our article for more information on how income protection insurance works.
Benefits of income protection
Maintain the life you’re used to
Loss of income can hit in many subtle and not-so-subtle ways. Forced to cut costs and the first things that go will probably be big ticket items: holiday plans and fuel, for example. But your subscriptions (Netflix, Amazon Prime, Disney +) and the little luxuries you enjoy (food, drinks, entertainment) may be on the chopping block too.
Unless you’ve a safety net in play, a loss of income can mean scrambling to make ends meet.
You might have to borrow or downsize. You may wind up cancelling hobbies and deleting parts of your routine that you’re used to.
Keep your savings intact
Income protection policies mean you don’t have to dip into your savings.
Chances are you were saving for something meaningful, not so you could cover day to day costs.
Remember - key decisions for an income protection policy:
What percentage …
...of your wage do you want to protect? (it’s typically between 50% and 70%)
How many years…
...do you want your income protection policy to run for? (maybe five years, or 25 years, or until retirement)
How long …
...your ‘claim period’ is, for how long payments keep coming for any single instance of sickness? (maybe six months, a year or two, or until retirement)
Income protection - Your grace period
After how long off sick should payment start? The answer usually lines up with existing sick pay. If your work offers six months sick pay - pick six months. If you don’t currently get sick pay - pick ASAP.
What ‘unable to work’ means for you
A designer who breaks a leg can still work, a roofer who breaks a leg can’t. This part makes the policy specific to your job, defining sickness/ injury types that’d force you offline.
What does income protection cover?
Illness - If you are signed off work by your GP for any illness, your policy is there for you and will start paying out once your deferment period has ended - it could be anything from anxiety or depression, to a stroke or heart attack. Income protection extends to any reason you're forced off work sick.
Accident / injury - From car accidents and broken bones, to putting your back out in the gym. Your policy will start protecting you once your deferment period has ended and if your GP believes you are unable to work.
What isn't covered by income protection?
Death - Income protection doesn't cover you upon death. Instead, you would need a life insurance policy.
Redundancy - Income protection doesn’t cover redundancy, only health-based absence from work while you’re still employed. Redundancy cover can be bought as part of mortgage protection insurance so if in doubt speak with an expert adviser.
Dismissal - It falls into the same category as redundancy, and isn't covered under income protection.
Do I need income protection?
It's a pretty good idea! Unlike other protection products like life insurance and critical illness insurance, which are traditionally most suited to people with debts (usually a mortgage) - income protection insurance is a useful solution for nearly everyone.
That’s because most of us earn a regular income and would struggle financially to cover our outgoings if we were unable to work.
Ask yourself this:
- Could you or your family cover your regular outgoings if you couldn’t work?
- Would you get any financial support from your employer if you went off work sick?
- Are you entitled to any state support if you couldn’t work due to ill-health?
- Do you have any savings that you’d be able to use if you couldn’t work?
- If you lost your income, could you change your lifestyle to reduce your regular outgoings, and would you be happy to do that?,
If your answer to any of these is no, then income protection is a pretty sensible idea.
Planning what if...
When talking income protection, people commonly say three things:
You’re much more likely to get sick and need time off work than you are to die before retirement age.
It’s stats time. Around one million UK workers go off work sick each year and roughly 250,000 people –1% of the UK workforce – leave jobs each year because of ill health. Six in ten (150,000) of those who leave jobs due to sickness are their household’s main breadwinner.
In Q4 2021, an estimated one third (33.6%) of the UK labour force was suffering long-term health issues. That’s 3.5% higher than it was five years ago.
Sure, you could. But why would you? You can leave your rainy-day fund in tact if you have income protection to fall back on.
Understood, but your household probably still needs and uses your income. At LifeSearch we talk around about the ‘kicker’ income; the secondary wage which quietly does a job, covering things like fuel or groceries and so on. Your household might not need it, but it will be stretched if it’s gone.
More benefits of income protection
Unlike other insurance policies, you can claim on income protection as many times as you need over the life of your policy.
Your income protection payments keep coming until one of a handful of things happen:
- You return to work
- Your policy term expires
- Your payment/ claim term expires
- You leave your job
- You retire
- You die
There may be some small print to factor in, so for absolute clarity on an existing or future income protection policy, please speak with a LifeSearch adviser.
How much does income protection insurance cost?
The average cost of an Income Protection policy, to cover you until the age of 65:
|Starting Age||Cost to cover £1,500 monthly income|
||£10.13 per month|
||£11.05 per month|
||£12.62 per month|
||£15.32 per month|
|45||£18.96 per month|
||£26.30 per month|
*Pricing information obtained 08/06/2023. This data is based on a client with no medical history, a 3 month deferment period with a 2-year claim period in an administrative role.
Income protection insurance costs vary based on how you earn, what percentage you want to replace, and for how long you want cover to last. It also takes into account the usual factors such as your age, health, occupation and if you’ve any hazardous or high-risk hobbies.
Income protection cost and cover calculator
Our simple calculator can help you to work out what insurance you need and give you estimated costs for different types of life cover. You can then speak to an adviser or buy online.
Protect your foundations
Income protection is particularly useful for younger people, renters and those who don’t (yet) have kids.
While life insurance itself may be unnecessary, income protection firms up the foundations of the life you’re building. It protects your plans; your momentum.
Your income is probably the bedrock of your life. Protect it and you don’t need to consider downsizing your lifestyle or moving back in with parents. Your savings are safe. You can maintain financial momentum without taking several steps back.
Frequently asked questions about income protection
Assuming you’ve kept up your monthly policy payments, you can activate your income protection if ever you’re signed off work sick, you simply make a claim against your income protection policy.
Once your deferment or grace period – which you selected at application – is over, medical and employer checks may be made and, once everything’s confirmed, your claims payments will start.
They’ll last as long as you need them to until one of the following things happen:
- you return to work
- your policy term expiresyour payment/ claim term expires
- you leave your job
- you retireyou die
If you’re off sick long-term, your insurer may regularly check in with your doctor and/ or employer to stay current with your situation.
The short version is that as long as you’re off sick and all parties agree, your income protection payments keep coming until the situation changes.
Really, all job types. If you have a zero hours contract or you’re self-employed, contract or freelance you probably won’t get sick pay, and it’s unlikely you’ll be able to access SSP, so income protection has a particularly crucial role to play.
Full time employees may have some sick pay arrangements in play (X months’ full pay, X months’ half pay is a common one), but sick pay benefits are not as favourable today as they once were and most expire fairly quickly.
Income protection typically covers somewhere between 50 and 70% of a person’s wage, but you can go bigger.
When applying for income protection – just like with any other insurance policy – you’ll pick a cover term i.e. how long the policy runs. Typically, it’s 10 years, 15 years or it could be right up until retirement age.
Yes they do. As in all cases, insurers have to confirm the detail and circumstances of an individual’s case. So when a claim is made, medical checks may be carried out and for the duration you’re off sick, the insurer will check in with your doctor and/ or employer for updates on the situation.
The answer differs insurer to insurer but we’ll go out on a limb and say that most insurers do cover periods of absence due to Covid-19.
But most instances of Covid-19 last for a short period of time, so your income protection policy needs to align (your grace period, your claim period) to satisfy a claim.
What’s more relevant here is Long Covid, which we’re all learning more and more about as the weeks pass. Where Long Covid forces a significant period off work, income protection will pay in most cases - assuming medics and your employer agree. However do bear in mind that this doesn’t cover pre-existing long covid symptoms.
Critical illness cover pays a one-off cash lump sum upon diagnosis of something life-changing. It’s a significant one-time payment designed to help you and the people you love make new arrangements, and prepare for a life that’s about to change dramatically.
Your income protection policy assumes you’ll recover, partially or fully, and get back to work sooner or later. There’s no lump sum payout … it steadily keeps the cashflow coming.
Income protection and critical illness do different things but they work well together, hand-in-hand, as two policies covering all outcomes.
A different kind of income protection can be purchased by an employer.
Protecting employees through a company can offer tax advantages so if you’re an employer – or a decision maker – speak with a specialist LifeSearch business protection adviser.
If your income depends entirely on your ability to work then income protection is a very good idea. Even a few weeks out the game can be devastating to your bottom line.
If you work for yourself, getting sick can mean lost momentum with projects and clients. It can undo good work done - so it’s worth thinking not just about the immediate impact of getting sick, but the aftermath too.
After a significant absence, how long will it take you to get back to where you were?
Easy guides to help you get started
Why you need income protection insurance
The top five reasons people don’t buy income protection insurance and why it might be time to rethink.
By Katie Crook-Davies, Protection Writer4 min read
A quick guide to income protection insurance
Income protection insurance is a product we think you should know more about. Get the facts in our two-minute guide.
By Katie Crook-Davies, Protection Writer2 min read
What sickness benefits can I get if can't work?
Wondering what support you’d receive if you fell ill and couldn’t work? This guide has the answers.
By Katie Crook-Davies, Protection Writer5 min read