Income protection insurance
Worried about loss of earnings? Compare income protection insurance [1]
What is income protection insurance?
Income protection insurance provides financial cover if you find yourself unable to work for an extended period due to illness or injury, or if you’re made redundant involuntarily.
It helps by paying you a portion of your monthly salary to cover outgoings, like your mortgage and household bills, for a set amount of time. There are both long and short-term options available, depending on your needs.
Do I need it?
It can give you peace of mind that you and your family would be able to cope financially if you were unable to work through no fault of your own, especially with the cost of living increasing so dramatically.
Consider how you would be able to afford your outgoings without a salary, especially if you have dependants. If you think that you would start to fall behind on bills relatively quickly and have little money saved up, you may want to think about income protection insurance.
Although your employer may continue to pay your income in full if you’re ill or have an accident, it will likely only be for a short period. After which you may receive statutory sick pay lasting for 28 weeks, currently this equates to £99.35 per week. You’re able to claim both statutory sick pay and income protection payments at the same time.
Income protection can give you the breathing room you need to get back to being fully fit or to find a job if you’re made redundant unexpectedly.
What does income protection insurance cover?
There are a few different types of income protection insurance to choose from depending on your circumstances.
You may want a policy to cover a certain outgoing, for instance your mortgage or loan repayments, alternatively you can pick one that deposits money in your account each month to be used on whatever you need. Consider which kind would be most useful to you before applying.
In 2020, 86% of all new income protection claims were paid, with average claim value being £23,380[1]
Get protected[1]According to a 2022 article from the Association of British Insurers, the average value of a paid income protection claim was £23,380 with 86% of new claims paying out.
How does it work?
Typically, you can take out a policy that covers between 50-70% of your pre-tax monthly income for a predetermined length of time, although this can differ between insurers so it’s always best to check.
It will pay out if you’re ill or injured and can’t work for an extended period. An accident, sickness and unemployment insurance policy will also cover you if you’re made redundant (unless it’s voluntary).
Short or long term?
It’s possible to choose between short and long-term options:
Short-term income protection: Will pay out for a set amount of time, usually between one and two years if you’re sick, have an accident or are made redundant
Long-term income protection: This will usually only cover sickness and accidents, not redundancy, but you’ll receive payouts until you return to work,reach retirement age or die, whichever is first. Premiums tend to be higher than short-term options
Types of income protection insurance
Choose from:
Accident and sickness
The policy will pay out if you’re injured or ill and unable to work for an extended period
Accident, sickness and unemployment (ASU)
Provides the same cover as an accident and sickness policy, but also if you’re made redundant
Payment protection insurance (PPI)
Covers repayments on a singular type of debt while you’re off work, for instance your mortgage, a loan or credit card
Mortgage payment protection insurance (MPPI)
Covers your monthly mortgage repayments, so that you don’t fall behind and risk your home being repossessed if you’re not receiving your normal salary
Guaranteed income protection
The price of your premium won’t increase during the term unless you want to change your level of cover. This type of policy is usually more expensive than reviewable options in the beginning, but can work out to be cheaper overall if you need long-term income protection
Reviewable income protection
The insurer periodically reviews your policy and will usually increase your premium as you age. Although it may start off being cheaper than guaranteed income protection, you have no control over how much you’ll be charged as the years go on
Index-linked income protection
Your monthly payout and premium track an index reported by the Office of National Statistics, like the Consumer Price Index, to combat inflation. This means both can increase or decrease depending on the economic situation
How much is income protection insurance?
It will depend on a few different factors, including:
Salary coverage: If you want to cover a higher percentage of your salary, it will be more expensive. For instance, if you want to be insured for 70% of your monthly income rather than 50%
Age: Older policyholders will usually be charged higher premiums than younger individuals
Health: Medical issues that make it more likely that you’ll need to make a claim can raise your premiums
Type of job: Insurers consider certain jobs to be riskier than others. If there’s an increased risk of an accident occurring, you may have to pay more
Smoker status: Smoking causes a range of health problems, so smokers are typically charged more
Deferment period: This is how long you’ll need to wait between your first day off work and receiving your first income protection payment. A longer deferment periods can lower your premium
Length of payment period: Long-term income protection policies will typically charge more than short-term policies because there’s a higher chance that you’ll need to claim over the years
All of this information will be taken into account when you apply for income protection to help the insurer calculate your premium.
Alternatives
If income protection insurance isn’t the right option, you may want to consider:
Life insurance – Your loved ones will receive a payout if you die during the policy term. There are a few different types to choose from, including level-term and decreasing cover
Death in service cover – Some employers offer this type of cover which pays out a lump sum to your family if you die while on the payroll. The amount is usually a multiple of your annual salary
Critical illness cover – This pays out a lump sum if you’re diagnosed with a critical illness mentioned in the policy’s terms and conditions. It may be included with certain life insurance products
Savings – Think about putting money aside from your salary each month as an emergency fund in case you’re unable to work. Try putting it in a separate savings account to discourage you from dipping into in unless completely necessary
Could your savings cover you for long if you were out of work?
Compare income protectionFrequently asked questions
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Yes, it’s possible but this won’t enable you to cover a higher percentage of your salary. For instance, taking out two separate income protection policies each covering 50% of your income won’t result in monthly payments that cover 100% of your monthly salary. Your payout will still only be 50%.
It’s important to notify insurers if you have more than one income protection policy.
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If you’re made redundant involuntarily and you have an accident, sickness and unemployment insurance policy, you should receive your monthly payments after the deferment period ends.
If you take voluntary redundancy, leave your job or are fired, you won’t receive a payout.
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You won’t need to reapply, but it’s a good opportunity to review your policy with the insurer. They’ll want to know what your new position is, which may affect your premium if it’s considered risky.
Hopefully your salary will increase with your new role, so you may want to up your level of cover to reflect this.
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It won’t automatically increase, you’ll need to contact the insurer and let them know that you want to change your cover level (if you would like to).
If you do increase your cover, your monthly premium will be more expensive.
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Every policy will have an exclusion period, the length of which will be detailed in the terms and conditions.
It begins on your policy start date and can last up to 120 days, during which you’re unable to make a claim. This is to help prevent people taking out income protection cover knowing that it’s highly likely that they’ll be made redundant soon.
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No, for family members to receive a payment when you die, you’ll need to take out a life insurance policy. Cover from income protection insurance will stop if you die during the term.
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MPPI is specifically designed to cover your mortgage payments, alternatively you could choose an option that isn’t tied to a specific kind of debt but still use it to pay off some or all of your monthly mortgage payments.
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You may struggle to find an insurer willing to provide you with income protection cover if you have a poor credit history as it can be an indicator that you may struggle to keep up with paying your premiums.
If in doubt, speak to the insurer directly to see whether they’re willing to cover someone in your financial circumstances, or alternatively you may want to talk to a financial adviser who will do the hard work for you to find products that fit your needs (you may be charged for this service though).
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Directors of limited companies who want to claim income protection as a business expense may want to choose an executive income protection policy. This enables the company to pay for the monthly premium and any payout would go to the business.
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You’ll need to provide us with information on:
- Employment status and salary
- How much you’d like to be covered for
- Residential status
- Your details – Name, date of birth, phone number, address etc
- Smoker status
You’ll then be shown the quotes that match your requirements, so you can easily compare the options available and make the right choice for you.
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