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.

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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. 

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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.

How do I buy income protection insurance?

Premiums can vary and different insurers can use very different criteria. So it’s worth shopping around and doing a bit of research. 

The best way to make sure you get what you need is to get advice from an independent financial adviser or specialist broker. They can take you through the details of the various policies available, and make sure you choose the right one.

They might charge a fee for their services, or they might be paid in commission by insurance companies.

There are also specialist brokers and insurers for people who have been declined insurance. This might be perhaps because of a medical condition or because they do a job that isn’t covered by standard policies.

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Five things to think about when buying income protection insurance

1. Be honest about your medical history

It’s important to give your insurer all the information they ask for. When you make a claim, the insurer will check your medical history. If you didn’t answer truthfully or accurately in your application, or didn’t disclose something, you might not get a payout that you need.

2. Choose a suitable level of cover

You can choose from three main levels of cover, which pay out based on your situation:

  • Own occupation – you can’t do your own occupation. This is usually the most expensive, but it’s also more likely that you’ll make a successful claim.
  • Suited occupation – you can’t do your own job or a similar one that suits your qualifications and experience.
  • Any occupation – you’re too ill to do any kind of work. This is usually the cheapest, but there is a higher risk of it not paying out.

3. Read the small print

Take your time reading and completing the application. Make sure you know exactly what is and isn’t covered. Be aware that definitions and exclusions (what isn’t covered) can vary between different insurers. If you see something you don’t understand, ask the insurer, an insurance broker or a financial adviser.

4. You can change your mind

You have 30 days from buying the policy to change your mind and get a full refund.

5. Keep your cover up-to-date

Circumstances can change over time, so review your policy regularly to make sure that it would still cover what you need.

You might need to increase it. For example, if you have a child or take out a new mortgage you might need more cover than your policy currently provides. Or if you get a new job that comes with more generous sick pay, you might be able to decrease your level of cover.

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MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

Continue to website
Looking for us? Now, we’re MoneyHelper

MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

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