Income Protection
What is income protection insurance?
What is income protection insurance?
Many of us would struggle to keep on top of our essential outgoings, such as mortgage and rent, if we lost an income due to illness or an accident. Income protection is a long-term insurance policy that makes sure you get a regular income until you retire or are able to return to work. Find out how does it works, when you need it and what you need to think about when buying it.
How does income protection insurance work?
Income protection insurance:
provides regular payments that replace part of your income if you’re unable to work due to illness or an accident
pays out until you can start working again – or until you retire, die or reach the end of the policy term – whichever is sooner
typically pays out between 50% and 65% of your income if you’re unable to work
covers most illnesses that leave you unable to work – either in the short or long term (depending on the type of policy and its definition of incapacity)
can be claimed as many times as you need to while the policy lasts.
There’s often a pre-agreed waiting (‘deferred’) period before the payments start. The most common waiting periods are 4, 13, 26 weeks and a year. The longer you wait, the lower the monthly premiums.
It’s not the same as critical illness insurance, which pays out a one-off lump sum if you have a specific serious illness.
When do you need income protection insurance?
When we’re unable to work due to illness or an accident, you might assume that your employer will continue to give you some level of income.
In reality, however, employees are usually moved onto Statutory Sick Pay within six months.
Very few employers support their staff for more than a year if they’re off sick from work. Check what your employer will provide for you if you’re off sick.
Depending on the level of savings you have, the loss of an income can soon leave you unable to pay essential household bills, such as mortgage/rent and utilities.
It can be particularly difficult if you’re self-employed and so have no sick pay to fall back on.
Who doesn’t need income protection insurance?
You might not need income protection insurance if:
you could get by on your sick pay – for example, you have an employee benefits package that gives you an income for 12 months or more
you could survive on government benefits – provided they’re enough to cover all your outgoings
you have enough savings to support yourself – be aware that your savings might need to last a long time
you could take early retirement
your partner or family would support you – for example, your partner has enough income to cover everything you both need.
How much does income protection insurance cost?
The amount you pay each month in premiums will depend on the policy and your circumstances.
Income protection policies cover a wide range of illnesses, conditions and situations. So it’s important to compare what different insurers can offer you.
The cost is affected by:
your age
your occupation
whether you smoke or have smoked
the percentage of income you’d like to cover
the waiting (or 'deferred') period until the policy pays out
the range of illnesses and injuries covered
health – your current health, weight and family medical history.
The cost will also depend on whether you pay:
a standard premium, which the insurer can increase over time, or
a guaranteed premium, which remains fixed for as long as you have the policy.
Guaranteed premiums can cost slightly more in the short-term, But many people like the security of knowing what they’ll be paying in future.
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