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Income protection insurance explained

Learn more about income protection insurance and how you can use it to protect your home, family and finances

A photo of Grace Lynch, the author

By Grace Lynch

Published on: 15 January 2021

6 min read

Income protection insurance explained 

All of us will get sick or injured at some point in our lives. It’s sad but it’s true, and it can be a good idea to have protection in place in case this happens. No one wants to be left struggling if they are signed off work and suddenly can’t afford to pay for the basic things like heat and electricity anymore.  

You may have heard of income protection insurance before, but most people don’t fully understand what it is and so don’t have it. This is a common issue with this type of insurance, which is a shame as it can be very useful.  

But with a cost-of-living crisis in full force, you might wonder whether a new insurance policy is really worth paying extra for right now. We aim to explain the main points of income protection insurance, so you can decide whether you think it is a policy worth having. 

What is income protection? 

Income protection is an insurance policy that basically works as a financial safety net. This type of cover is designed to pay out to you if you are unable to work due to illness (physical or mental health conditions) or injury.  

The key facts about income protection are: 

  • You pay each month (premium) for your cover – if you stop paying, your cover stops too. 
  • If you cannot work for an extended time (usually 4 or more weeks) and are signed off work by your doctor or GP, you can claim on your policy 
  • You will receive a regular tax-free payment each month until you return to work, or you reach the end of the claim period agreed in your policy (most often 12 or 24 months) 
  • These payments will generally cover between 50%-70% of your normal monthly income

Imagine you were in an accident or suddenly became seriously ill, this would likely prevent you from going to work as normal. You could really struggle financially, particularly if you needed weeks or even months to recover. 

You could use the regular monthly payments provided by your income protection policy to cover expenses such as: 

  • Mortgage or rent payments 
  • Household bills 
  • School fees 
  • Medical bills  
  • Debts or finance arrangements e.g. car finance 
  • Cost of living (food, clothing etc) 

How much does income protection insurance cost? 

This can vary depending on your budget and the provider you choose. A good thing about income protection policies is they are very flexible. You can choose the policy and level of cover based on how much you can afford to pay. 

You can reduce the cost of income protection policies by:

  • Taking out less cover
  • Comparing policy prices across providers
  • Choosing a longer deferred (waiting) period before your claim payments start

Note: Don’t be tempted to take out a high amount of cover if you might not be able to pay for it long term. It is better to have less cover that you can realistically afford, than a policy you could struggle to pay for later. 

Find out more about how much you should be paying for your cover in our ‘How much is income protection insurance?’ guide. 

Pros and Cons of income protection insurance 

We know the main thing you want to know about income protection will be the facts, both good and bad. What are the advantages (and of course the disadvantages) to this type of insurance? 

Below we have some of the main pros and cons of income protection insurance: 

Pro Con 
Peace of mind that you have financial protection in place Some providers could place ‘exclusions’ (things you can’t claim for) on your cover. This would be due thing such as a pre-existing medical condition or high-risk job for example. 
Regular tax-free pay outs you can use to replace your monthly income Cover can be more expensive depending on your age when you apply 
Widely available form of insurance, so a lot of options to choose from Some policies won’t cover people with certain medical conditions 
Flexible levels of cover to suit different budgets You may find it hard to choose which type of income protection policy is best 
No need to rush back to work before you are ready due to worrying about paying bills There are age limits for this cover. You will need to be between the ages of 18-70. 
Will cover you for most illnesses and injuries You can’t be covered for 100% of your income (you will be covered for between 50%-70% depending on your policy) 

Income protection insurance comparison 

The best way to save money on any insurance policy will be to compare what is on offer from multiple providers. Luckily, income protection is widely available, so you have quite a few providers to choose from.  

Insurance companies currently providing income protection insurance in the UK include: 

  • Legal & General 
  • Aviva 
  • LV= (Liverpool Victoria) 
  • Vitality 
  • Royal London 
  • Zurich  
  • AIG 

Can I tailor my income protection cover to my budget? 

One of the best things about income protection is there are a few different options to choose from – plus you can choose the level of cover you have depending on how much you want to pay! 

The main types of income protection are: 

Short term income protection insurance As the name suggests, this covers you for a shorter amount of years (e.g. 10 years) and will pay out for 12 or 24 months. Because of this, the pricing will be lower. 
Long term income protection insurance Can be more expensive but will pay out for the entire policy term when you claim. This means if you are covered for 20 years and claim in year 6 of your cover, you could receive monthly payments for up to 14 years! 
Guaranteed sick pay A low cost policy for most, with the bonus that you won’t need to complete any medical checks. 
Personal accident insurance Specifically designed to pay out if you are injured in an accident e.g. a car accident.  

Can I get self-employed income protection? 

You might think you have to work for an employer to have income protection insurance, but self-employed workers can have it too.  

In fact, self-employed people can even benefit more from this cover since they can’t claim statutory sick pay and won’t have a workplace sickness scheme to fall back on.  

How much income protection insurance do I need? 

Everyone’s lives and finances are different so how much cover you need can vary. The main things to think about when working out how much income protection cover to get are: 

  • Will you still be able to pay your rent or mortgage repayments if you can’t work? 
  • Do you have any debts that need to be repaid regularly? E.g. credit cards or IVAs 
  • Do you have any other outgoings to pay for? E.g. phone contract, car finance 
  • Do you have any dependents that rely on your income? (adults or children) 
  • Do you have enough savings to support yourself if needed? 

More key things to consider when deciding whether to buy income protection insurance are: 

  • Your budget: can you afford to pay for this policy long term? 
  • Your employer: if you are employed, does your workplace have a sick pay scheme? 
  • Savings: do you have enough saved to support you if you were unable to work for an extended amount of time? 
  • Are you self-employed?: self-employed people won’t be able to access some standard forms of financial support such as Statutory Sick Pay (SSP) 
  • Do you have any other insurance policies?: Critical illness cover for example can provide a similar level of cover, but will only pay out one lump sum rather than regular payments 

Ultimately, whether you decide to buy income protection is up to you. There are a lot of benefits to this type of insurance, but whether it is the right choice for you will usually come down to why you need the cover and your budget. 

How do I buy income protection insurance? 

There are a few ways you can buy an income protection policy. These are: 

If you have researched the available policies and decided on your insurance provider, you could speak to them directly. If you’re not sure which policy or provider will be best, it’s definitely worth speaking to someone who knows what they are talking about.  

An insurance advisor can help you compare various policies and prices, to make sure you choose the policy that is best suited to your needs and how much you can afford to pay. 

Resources 

Safe Workers – Average sick days in the UK 2022 

Statista – Sickness absence rate in the UK 1995-2021 

Citizen’s Advice – Check if you can get sick pay 

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