Beginners' guide to income protection insurance

Learn the basics of income protection insurance, including what it covers, why you might need it and the factors affecting your premium.

Key points

  • Can offer monthly payments if you're unable to work
  • Can cover accident and sickness and/or unemployment - check policy with care and beware of exclusions
  • Consider the pros and cons of income protection alongside building up your own savings pot, critical illness cover and/or life insurance

What is income protection insurance?

Income protection insurance, or IP insurance as it's also known, can provide cover if you're not able to work.

There are typically three types of things that you're protected against - accident and sickness only, unemployment only and the more comprehensive, accident, sickness and unemployment cover.

You're able to protect up to 70% of your gross salary and it's designed to replace your income and to pay out a tax-free monthly sum, which can be used to help ease any financial hardship whilst you're unable to work.

Why should you take out income protection?

Income protection is a useful product for anyone who wants to cover their salary so they don't fall behind with monthly outgoings should they be unable to work.Income protection

Typical times when people consider it include:

  • If they'd struggle to make ends meet if they had no incoming salary
  • If they have dependants
  • If they're self employed

How long is the policy term?

With you can compare policy terms from one to 75 years, but note that most providers will only cover you up to retirement age, and the maximum age generally acceptable as a retirement age is 70.

Wait periods

  • Your income protection provider will only pay out after a deferred period - a pre-determined amount of time, usually between four and 52 weeks

Rather than looking at retirement, many people choose a set period of time which is often linked to the expected repayment date of a mortgage or another finance agreement.

You're not typically tied to the policy for that period of time, but so long as you continue to meet your premium payments the protection will remain in force.

How long is the benefit term?

The longer you want a policy to have the provision pay out for (the 'benefit term'), the more the premium is likely to cost.

Short-term income protection policies are designed to provide you with payouts should you be unable to work for a set period of time, usually between six and 12 months.

Long-term income protection insurance can provide cover if you become so ill that it's unlikely you'll be able to work again.

Benefit amount: How much cover is needed?

How much cover you need will depend on your circumstances and it's important to neither under- or overestimate the amount - read more about how to get the right income protection in our guide.

Typical exclusions

  • Pre-existing medical conditions you were aware of before taking out a policy
  • Disabilities or illnesses as a result of a criminal act
  • Self-inflicted injuries
  • Pregnancy
  • Alcohol or drug abuse

Generally the maximum amount of income you can recover through IP insurance is around 70% of your gross monthly earnings (your earnings before tax), but note that the payout is normally tax free.

You can choose to insure a smaller percentage than that, which will mean your premiums should be lower.

Some insurers also offer the option of protecting the value of any employment benefits such as a company car or private health insurance. Such benefits may also be known as benefits in kind, or P11D benefits.

Remember to consider state benefits, plus the value and terms of other protection products you may have in place to protect you and your family, such as critical illness cover and/or life insurance.

You may have any or all of these protection policies in place through your employer, but if you leave your job or lose it you'll also lose that insurance.

Self-insuring is another consideration, whereby you save the money that you would have paid in premiums to build up your own funds.

While everybody needs a rainy-day savings fund, you should be aware that you may need a very significant sum to match the sort of payouts that can be offered by policies like life insurance, critical illness cover and income protection.Income protection

Types of income protection policy

If you've decided to choose an income protection product, consider the type of policy that would fit your needs. Options include:

Guaranteed policies

These will guarantee that the premium you pay stays the same for the duration of the policy term - whether it's five or 25 years - unless you choose to increase the cover available, which will in turn raise your premium.

Although this policy tends to be the most expensive initially, it can work out cheaper in the long run.

Reviewable policies

This type of policy is reviewed by the provider at regular intervals, often annually, which may well result in your premium increasing year on year.

Advice on income protection

  • If you enter's income protection quote journey you'll see an 0800 number you can call for fee-free, impartial advice

Reviewable policies tend to start out cheaper than guaranteed policies, but may work out more expensive over the medium-to-long term.

Age-related policies

Your premium will increase every year in line with your age, but you'll know how much by.

After their initial set-up, age-related policies aren't affected by lifestyle or occupation so tend to be popular with people who pay higher premiums because they're a greater risk to insure eg smokers and those with dangerous occupations.

Specific product areas

There are a number of products available which offer protection should you find yourself without your regular income, whether this is through illness or unemployment.

Although they may offer slightly different cover, all the following products fall under the broad umbrella of income protection insurance, including:

Payment protection insurance

Payment protection insurance, or PPI, provides cover for loan repayments and/or minimum monthly credit card payments should you be unable to work.Mortgage protection

Mortgage payment protection insurance

Mortgage payment protection insurance can provide policy holders with a payout which is equivalent to their monthly mortgage payments during the period that they're unable to work due to accident, sickness or unemployment.

Loan protection insurance

Loan protection insurance is a form of income protection which will pay your monthly loan repayments if you're not able to do so yourself because of accident, illness or unemployment.

Unemployment protection insurance

As the name suggests, unemployment protection insurance - also known as redundancy insurance - could provide cover should you find yourself out of work by paying out a monthly sum for a predetermined period.

Optional cover

Apart from the monthly payout you'll receive if you make a claim, you may also be able to get cover for:

Did you know...?

  • Soldiers, fire fighters and off-shore oil workers can expect to pay more than teachers, office and shop workers

Waiver of premiums

You usually have to keep paying your premiums for your policy to be valid, even if you're unable to work.

To avoid this, consider taking out waiver of premiums which provides cover on your payments during the period that you're incapacitated.


Some insurers may offer additional support to get you back to work, such as retraining or assistance in finding a new job. Some could even pay a partial benefit if you go back to work part-time.

Terminal illness cover

If you're diagnosed with a terminal illness and aren't likely to survive past 12 months, your insurer may permit you to take a lump-sum benefit equivalent to what would normally be paid over a set period, for example six months.Funeral_wreath_teaser

It will depend on your policy whether terminal illness cover is included as standard or as an added extra for an additional premium.


Some insurers may offer a death benefit. If cover is available, the insurer will pay a lump sum based on your monthly benefit amount.

Deferred periods

Your income protection provider will only pay out after a deferred period - a pre-determined amount of time sometimes called a wait period, which is usually between four and 52 weeks.

They'll then continue to pay out until you're able to return to work or the policy expires (usually when you reach retirement or at the end of a fixed period).

Did you know...?

  • If you use e-cigarettes and/or nicotine patches they will be classed as tobacco products and you could face the same higher premiums as cigarette, cigar and pipe smokers

You choose the length of the deferred period when you take out the policy - the longer the deferred period, the lower your premiums are likely to be.

Remember that you should pick a deferred period which won't cause you undue financial hardship should you be unable to work.

Also be aware of whether your employer will pay your salary for a certain period, for example the first six months, and think about choosing a deferral period that coincides with the ending of this.

There may also be the option to back-date your income protection payments to the start of when you were unable to work, which is known as a back-to-day-one option.

Occupation class

The occupation class on your policy plays a part in determining premiums and when you may be eligible for a payout, and there are typically three classes to choose from:Unemployment protection

Own occupation

This type of policy provides cover in the event that you're not able to perform your own specific job. Cover for this occupation class is likely to be the most expensive.

Suited occupation

The policy gives protection if you're unable to do a job that's suited to your experience and skills.

Any occupation

The insurer will stipulate that you must be unfit to pursue any occupation. Cover for this occupation class is likely to be the cheapest.

Deductions from IP payments

If you fall ill or are injured, an income protection policy will pay out up to the benefit limit but only after the deferred period and after deducting:

  • Sick pay or wages
  • Income from self-employment
  • Any pension payment that starts on the date of incapacity
  • Insurance payments from another policy
  • Other types of income, such as dividends from shares

Your payout will not usually be reduced for the following, but you should check your terms and conditions as some policies may take these things into account:

  • Social security benefits
  • Means-tested benefits, such as income support
  • Investment income

Note that the receipt of income protection payouts may impact on your ability to receive state benefits - payouts will be assessed by the government when looking at your means-tested benefits.

How income protection insurance premiums are calculated

Insurers all have their own set of underwriting criteria that they use to determine premiums and identify how much of a risk you are - that is, how likely you are to make a claim, and how expensive that may be.

Generally they'll use the same determining factors but, as no two underwriting policies are identical, the premium price will vary from insurer to insurer.

Insurers will take into account factors such as the percentage of salary you want to insure, the length of the deferred period and the benefit period, the occupation class, but also how likely you are to make a claim by assessing influences such as:Stethoscope


Statistically the older you are, the more likely you are to make a claim.

Medical history

Your medical history will be taken into account when calculating premiums and past illnesses may be considered. Life-threatening conditions such as type 1 diabetes will bump up the price of your premium considerably.

Family health history

If there's a history of critical illness such as cancer running in your family, this may affect how much you pay.


If your occupation is deemed as high risk, this could be reflected in your premium as the chance of your getting injured is higher.

For example, soldiers, fire fighters and off-shore oil workers can expect to pay more than teachers, office and shop workers.

Smoking or tobacco use

Due to a proven link between smoking and lung and throat cancer, you're considered a higher risk if you use tobacco products.

This includes cigarettes, cigars, pipes, e-cigarettes and nicotine patches. Even if you're an occasional smoker your premium could be almost double that of a non-smoker.

Alcohol consumption

Regularly drinking more than the recommended weekly alcohol unit limit could contribute towards certain health problems, such as liver disease and hepatitis. Again such behaviour is likely to increase your premium.

Will gender affect my premium?

Gender used to be a major consideration as women tended to pay more due to risks such as breast cancer and pregnancy-related illnesses, but a 2012 European Court of Justice ruling made it illegal to use gender as a factor in determining premiums.

When should I review the amount I have insured?

If your earnings increase you should review the percentage of your salary that you have insured.

Some insurers will allow you to do this on an annual basis and others will require proof of a salary increase.

It may be possible to index link your cover so that it increases in line with inflation, but remember that you should still check it regularly to make sure that it meets your needs.

By Sean Davies


Appendix 1: Typical times when people consider income protection insurance

Buying a house

A house is likely to be the most expensive purchase you make, and taking out income protection could help you to keep on top of your mortgage payments if you're unable to work.

Birth of a child

Having an extra dependant relying on your salary could make you consider protecting your income.Wallet

Self-employed people

Self-employed people have no benefits other than those provided by the state, and being unable to work means being unable to earn.

Switching jobs

If you no longer receive the same kind of benefits that you did in your previous job in terms of things such as sick pay, you may want to protect your salary. Alternatively, if you get a better job or receive promotion, you may want to protect your increased earnings.

Additional financial commitments

For those who have taken on additional strains on their finances, for example a property portfolio, income protection could provide peace of mind.

Appendix 2: When might income protection not be right?

Bear in mind that unexpected events can always crop up and income protection could be a valuable back-up, but situations where you may want to think whether a policy is right for you include when:

  • You feel that your job's sick pay and/or redundancy package offers adequate cover
  • Government benefits could support you sufficiently
  • You have a substantial amount of savings which you could live off
  • A loved one would be able to support you until you got well or found a new job
  • You're thinking of taking out early retirement

Such situations could potentially be when it would make sense to think about building up your own savings rather than paying premiums for an income protection policy.

Remember that government benefits are usually only issued after a prolonged period of incapacity and may not be enough to pay your monthly outgoings, such as bills and food shopping. For more information on the options available, visit the benefits section on Gov.UK.