What is income protection? | moneyfacts.co.uk

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Published: 24/02/2021

At a glance

  • Income protection is a form of insurance that covers your earnings if you’re unable to work as a result of illness or injury.
  • It’s a long-term benefit that typically pays out until your return to the workplace or retirement.
  • You can get different levels of cover depending on your needs and budget.

Income protection is an insurance product that’s designed to cover your earnings if you’re unable to work due to unforeseen circumstances, such as illness or injury. It can pay out until retirement, the end of the policy term or your return to work, depending on your policy and circumstances, and there are also shorter-term (and cheaper) policies that will provide cover for a set number of years.

It’s different to critical illness cover in that it provides you with a regular monthly income, rather than a lump sum, which means it can offer long-term benefit. It’s a kind of policy that relatively few people think about, but could actually be one of the most important forms of insurance you have – few employers offer long-term sick pay and state aid from the Government invariably wouldn’t be enough to cover many people’s outgoings, which makes planning for long-term sickness a top priority.

What kind of income protection policies are available?

There are normally two core levels of cover to choose from, depending on how much protection you want, and prices will differ accordingly. These are:

  • Own occupation cover, which will pay out if you can’t do your own job. Such policies tend to be the most expensive.
  • Any occupation cover will only pay if you’re too ill to do any work at all, and is usually the cheapest (for example, if you’re a construction worker and damage your back, you could potentially still do non-manual work and therefore may not get a payout).

Suited occupation cover is a hybrid of the above two options, and will apply if you can’t do your own job or a similar one that’s suited to your experience and qualifications. There are also shorter-term income protection policies available – these are known as Accident, Sickness and Unemployment (ASU) products, and are a form of payment protection insurance that are often linked to a specific debt. These may be sold alongside mortgages, for example, and will cover your mortgage payments for a set amount of time. Because they’re short-term policies, they’ll typically be cheaper than traditional income protection products.

Featured income protection providers

    • Anorak is an independent online broker for life insurance, income protection and critical illness cover
    • Anorak helps you buy life insurance, income protection and critical illness cover
    • Anorak is a simple, convenient way to get expert advice and buy the right cover online
    • Anorak provides expert, unbiased advice online, and also has a team of advisers who can help over the phone
    • Anorak helps you get the right cover in place to protect your family financially 
    • Anorak is authorised and regulated by the Financial Conduct Authority (FCA)
Note

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Disclaimer

The list of income protection providers on this page is a selection of services available and gives you an idea of the kind of options available. You can find out more about the individual products by visiting any of the providers listed. All information is subject to change without notice. Please check all terms before making any decisions. This information is intended solely to provide guidance and is not financial advice. Moneyfacts.co.uk will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts.co.uk recommends you obtain independent financial advice.

Who is eligible for income protection?

Most people who are employed or self-employed and working above a certain number of hours a week will be eligible for income protection. However, criteria will differ according to individual providers, so make sure to do your research if you think you may have difficulty meeting certain requirements.

How much does income protection cost?

The cost of income protection insurance will vary depending on your individual circumstances and policy requirements. A few things that may affect the price include:

  • Your age (the younger you are, the cheaper the policy is likely to be, and vice versa)
  • Your job (certain occupations are deemed riskier than others)
  • Your health and medical history (if you’ve already got certain medical conditions you’re likely to pay more – and those conditions may be excluded from your policy – whereas if you’re in good health your premiums will likely be lower)
  • Your lifestyle and hobbies (if you engage in risky hobbies or lifestyle choices, such as smoking or drinking, your premiums are likely to be higher)
  • Your level of cover (whether you want own occupation or any occupation cover)
  • The waiting period (if you say you’ll wait longer between being out of work and receiving payments, your premiums may be cheaper)
  • The percentage of income you want covered.

How is income protection calculated?

Income protection is designed to help provide an income should you be unable to work, but it won’t entirely replace your previous earnings. Policies typically pay out about 50-70% of your usual earnings, with the reduction accounting for things like the state benefits you’ll be eligible to claim, the work-related expenses you’ll no longer be paying for (such as travel/commuting costs), and the fact that the income will be tax-free.

Though within that you’ll need to account for any additional expenses that may come to light should you become ill or disabled, such as the cost of medical equipment and higher heating bills. It’s important to take into account all of these factors when working out how much cover you’ll need, and always make sure that you’re insured for a sufficient amount to cover your outgoings.

How is income protection paid out?

Income protection is normally paid out on a monthly basis, much like a regular salary, although you won’t be able to claim these payments straight away. You’ll need to set what’s known as a waiting period (also known as a deferred period) when arranging your policy, which could be as little as four weeks or as long as two years, depending on your circumstances.

Some employers offer heightened sick pay policies, for example, or you may be able to claim statutory sick pay for up to 28 weeks, though this may not be enough to cover your outgoings. Many people choose a waiting period that will coincide with the date their employer stops offering sick pay, and the later that is, the cheaper your premiums are likely to be.

How long is income protection paid for?

This will depend on the policy, but typically, income protection is paid until you return to work or retire. Some policies will only pay out for a certain number of years, and if you’ve got a short-term ASU policy, payments may only continue for a year or two.

 

Do you need income protection for mortgage?

You don’t legally need to have income protection for a mortgage, but a lot of people take out such policies to ensure they’d be able to cover the mortgage payments in the event they were unable to work. There are certain ASU policies specifically designed to cover the mortgage, too, though while cheaper, benefits received can only be used for this purpose and will typically only last for a set term. It’s important to weigh up whether it would be more beneficial to get a more comprehensive policy.

Does life insurance need income protection?

Life insurance and income protection are two separate forms of cover, designed to insure against different events. It’s often wise to have both to prepare for all eventualities – income protection can provide an income should you be unable to work, and life insurance can give your loved ones a lump sum on your death that can be used to cover the mortgage and/or future bills. That said, one doesn’t necessarily need the other, and there’s no legal requirement to have both (or, indeed, either).

What does income protection not cover?

All policies are going to have exclusions, with the most common being pre-existing conditions. This means if you’re already suffering from a listed condition, you won’t be able to claim income protection if you have to give up work because of it. Other insurers may still offer cover, but you may be charged extra. However, policies are always tailored to your individual circumstances, so always speak to your insurer so you know exactly what’s covered – and what isn’t.

Does income protection cover loss of job?

Yes, if you’ve got an ASU product. These short-term policies will provide cover should you lose your job, provided it was through no fault of your own, such as in the case of involuntary redundancy. However, they won’t pay out if you take voluntary redundancy, lose your job through misconduct, or leave employment without having another job to go to.

Longer-term income protection policies don’t typically cover loss of income for any reason other than illness or injury, though some providers will offer unemployment cover as an extra feature for an additional cost.

Is it worth getting income protection?

Some people may find that income protection isn’t necessary, particularly if their employer offers enhanced sick pay, while some employers offer income protection insurance as part of an employee benefits package. Others may already have such a policy as part of their mortgage, for example, or even another insurance policy, so it’s always worth checking your current level of cover. Then there are those who already have a significant amount of savings, for whom paying extra for premiums may not seem worth it.

However, for many, income protection insurance can be invaluable. It can be particularly worth it if you don’t have any savings to fall back on if you were unable to work, and/or if your employer doesn’t offer enhanced sick pay. It can be especially important to consider if you’ve got a mortgage to pay and have dependents, as if you fell ill and were unable to pay the bills, you could be putting your family’s financial security in jeopardy. For this reason, income protection insurance should often be considered.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

At a glance

  • Income protection is a form of insurance that covers your earnings if you’re unable to work as a result of illness or injury.
  • It’s a long-term benefit that typically pays out until your return to the workplace or retirement.
  • You can get different levels of cover depending on your needs and budget.

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