How Long Does Income Protection Last?

Picture this (even if you may not want to) - you’ve seriously injured yourself or been diagnosed with a serious illness. You’re worried about your health and how you’re going to cope with day-to-day life and on top of that, you can’t go out to work to bring home the bacon for the foreseeable future. 

If you’ve got a mortgage to pay and particularly if you have no one else to rely on for money, then you may be thinking about income protection insurance. But what is income protection, what does it cover and how long does it actually last?

What is income protection?

Let’s start with the basics. In a nutshell, income protection is designed to give you a regular replacement income if you become ill or injured. Think about it - this could happen to anyone. In fact, according to ABI one million workers a year find themselves unable to work due to serious illness or injury [1]. No one is invincible! 

Income protection will usually pay a percentage of your normal salary - usually between 50% and 70% - and the cost of a policy boils down to your age, job, whether you smoke or have previously smoked, the percentage of income you’d like to cover and your current health and lifestyle. 

When taking out a policy, you’ll also agree to the range of illnesses and injuries covered, along with a ‘deferral’ period that you agree to when taking out your policy. This is the period of time between making a claim and when the benefit begins to be paid, so it’s worth looking into whether you’re eligible for sick pay from your employer and how long that would sustain you for. The longer the deferral period, the cheaper the premiums.

How long does income protection last?

There’s a few answers to this question. Firstly, you can choose if the policy ends at retirement, or at a certain age. Retirement is a common option, as because you’re no longer working, you obviously no longer have an income to protect. Income protection will also of course end if you pass away. It’s just as important - if not more important - to ensure that your family will be looked after financially when you’re no longer around. Income protection won’t pay out when you pass away, but that’s what life insurance is for.

Most commonly, income protection lasts until you’re well enough to return to work and continue earning your normal wage. This could be after two years, or even longer. If you are going to be out of work long enough for your sick pay to run out, but not long enough to warrant years and years of protection, there are short-term income protection policies out there which last for one or two years. Naturally, they’re much cheaper than a traditional income protection policy.

What happens if I’m made redundant?

Neither income protection or short-term income protection will pay out if you’re made redundant, get fired or if you’re partly responsible for losing your job. The bottom line is that it only pays out in the event of injury or illness. A policy may however continue to pay out if someone is made redundant during the time that they are out of work with sickness or injury and receiving benefits from an ongoing income protection claim. This differs between policies though, so check your small print. You can get specific redundancy or unemployment insurance if that’s something that you really feel like you should be covered against. 

References

[1] https://www.abi.org.uk/globalassets/sitecore/files/documents/publications/public/2014/protection/welfare-reform-for-the-21st-century.pdf