Income Protection Guide

What is Income Protection Insurance?

Income protection insurance offers peace of mind and security against lost income. If you are unable to work because of illness, the policy would pay out a portion of your monthly earnings, allowing you to continue to cover your essential outgoings.

These payments can be used to cover your rent or mortgage payments, bills and day-to-day living while you get back to work. The best policies will continue to pay out for as long as you cannot work, or until you are of retirement age.

How does Income Protection Work?

When you take out a policy, you agree to pay a monthly premium and the insurer agrees to pay out a monthly income benefit, should you become too ill or injured to work. Assuming you choose a policy with the ‘own occupation definition’, you will be covered for any health condition which stops you being able to fulfil your own specific job requirements.

All policies will have a ‘deferral period’ - a predefined amount of time you will wait between first being off work and the policy beginning to pay out. At the point of taking out the policy, you can select a deferral period to suit your needs. Advisers can take into account any savings you have, or sick pay benefits available from your employer, to calculate the right amount of waiting period for you. Waiting periods can be set for as short as one week. Once the waiting period has passed, the insurers would pay out your chosen monthly amount, while you are unable to do your job.

What Does it Cover?                                       

Unlike a Critical Illness policy, there isn’t a specific list of injuries or illnesses that a  Income Protection insurance policy covers. If you are unable to do your job because of illness or injury, then you should be able to claim on the insurance. This could be because of a broken leg, a sports injury, a mental illness, an operation, a back problem etc.

Some figures on claims from the Association of British Insurers:

• Musculoskeletal is the biggest reason for individual income protection claims, followed by mental health and then cancer
• £60.5 million was paid out in Individual Income Protection claims for mental health with an average claim of £15,728
• 8 million estimated working days lost due to work-related ill health and non-fatal workplace injuries in 2019/20 Health and Safety Executive

How Much Income Protection Cover Do I Need?

You can choose the amount of cover you require at the outset, when taking out a policy. You are able to protect a proportion of your gross income, not usually more than about 70%. 50 – 70% would be a typical amount – but don’t forget this is a proportion of your pre-tax earnings and the income benefit pay out is tax-free. You will also typically find that your essential outgoings would decrease if you were unable to work due to illness or injury. Your fuel or transport bill would be likely to reduce for example and exercise and leisure expenditure could cease. It is also a good idea to take into consideration your savings and how much that would help, when deciding how much cover to take out.

Who needs Income Protection Insurance?

Income Protection is perhaps one of the lesser-known protection insurance products on the market, but certainly one everyone of working age should consider. If you have monthly outgoings and don’t have indefinite sick pay from your employer – or enough savings to keep you going indefinitely – Income Protection is a good alternative.

What are the chances I really need it?

Nobody likes to think about illness, injury or losing your job, but unfortunately it happens to lots of people, every year. Have you considered how you would cope if you were to lose your income, for whatever reason? Here are some facts to consider:

• Each year one million workers find themselves unable to work. ABI.
• 31% of UK adults have experienced unexpected leave from work Aviva
• 48% of households have either no savings or less than £1500 savings ONS
• Only 43% of employers offer Occupational Sick Pay the rest are left with Statutory Sick Pay only.
• Statutory Sick Pay pays only £109.40 per week for 28 weeks, after the initial four days of illness. (Gov.uk)

How Much Does Income Protection Cost?

Monthly premiums will vary depending on a number of factors. Some of those are your choice over the level of cover you require, others relate to your circumstances and will be out of your control.

• Your age – the older you are the more expensive your premiums will be because you are less likely statistically to become ill when you are younger.
• Your Occupation – higher risk jobs will mean a more expensive premium as you are more likely to suffer an accidental injury if you are a manual worker for example compared to an office worker.
• Choosing a longer waiting period or deferral period before the policy kicks in will mean a lower premium. This can be tied to any sick pay you may be entitled to from your employer, as well as any savings you have to tide you over.
• Term of the policy – whilst a long term policy would pay out until retirement or your return to work, there are cheaper policies available which cover you for a certain term only, for example one or two years.

Some indicative example quotes:

• 25 year old Architect
• looking for a £1500 per month pay out amount
• with a three month waiting period
• full policy (meaning it will pay out until you return to work/retire)

= £18.89 per month premium

• 45 year old Architect
• looking for a £1500 per month pay out
• with a three month waiting period
• full policy (meaning it will pay out until you return to work/retire)

= £40.07 per month premium

What Does it Not Cover?

As long as you are completely honest with your adviser and there is nothing left undisclosed when you take out the policy, there shouldn’t be any reason why it doesn’t pay out when you most need it. However, as with all insurance policies, there will be some exclusions which apply to anyone. These are likely to include injuries or illnesses caused:

• As a result of travel to areas where travel is advised against by the Foreign and Commonwealth Office because of conflict, high terrorism risk etc
• As a result of criminal activities
• As a result of substance or alcohol misuse

Previous Conditions

If you have suffered from a medical condition previously, this could also be excluded from your policy. Each insurer has their own individual stance on how they will handle your circumstances, but if you have an existing condition, you can expect this to be reflected in the policy. You could:

• Have to pay an additional premium to cover the condition
• The condition could be excluded completely
• Some insurers may be happy to cover the condition completely, with no additional charge.

It depends upon each insurer’s appetite for risk as well as your individual circumstances. It is especially important to seek professional advice in this instance to make sure you have the best value and the most complete cover.

Income Protection Insurance only covers you if you are unable to work due to medical reasons, it does not cover you if you are made redundant. There are other policies available which cover for unemployment as well.

Critical Illness Insurance or Income Protection?

Income Protection should not be confused with Critical Illness Cover. Critical Illness Cover provides you with a tax-free lump sum should you be diagnosed with one of the critical illnesses listed on your policy. Critical illness does not cover your income specifically but will pay out a tax-free sum that will be used to cover your outgoings, usually covered by your income. When taking out cover, it is important to work out how much cover you and your family would need to still live comfortably should you become unwell.

What is the difference between Payment Protection and Income Protection?

Traditional Income Protection Insurance should not be confused with a Payment Protection Insurance (PPI). As the name suggests, Income Protection Insurance covers your income, whilst PPI is used to cover your outgoings and is usually aligned with a particular outstanding loan or debt. PPI policies are often sold as part of the deal when taking out a loan, mortgage or credit card, but can also be sold independently.

Income Protection is a more comprehensive policy which can cover all your essential outgoings in the event you lose your income due to illness or injury, whereas PPI would normally protect just the one outgoing loan or debt in the same circumstances.

PPI is usually short-term protection only and pays a claim for maximum one or two years regardless of whether you are able to return to work or not. A comprehensive long-term Income Protection policy will continue to pay your monthly income benefit until you are fit to return to work, or until you reach retirement age.