What is income protection insurance?
Income protection insurance is a long-term policy that would pay you a regular income if you were unable to work due to illness or injury.
It usually lasts until you are able to return to work, if you retire, if you die, or when the policy comes to an end, whichever is sooner.
The money you receive from it can be used to pay for a range of things such as mortgage payments, other finance payments, electricity and water bills, and food.
It’s not the same as critical illness cover, which pays out a lump sum if you get a specific serious illness.
How does income protection insurance work?
Income protection works by you initially taking out a policy with your chosen insurer. Policies will typically cover up to 60–70% of your monthly income, pre-tax, if you were to fall ill and unable to work. The reason you are unable to claim for 100% of your monthly income is because the payments will be tax free.
You will then pay a monthly premium that will be determined before you take out your policy. If you were to fall ill and unable to earn an income through work, you could then look to claim against your policy.
Most of the time you will have to wait a period before you are paid out, this is known as a ‘deferred period’. You can choose your deferred period when setting up your policy, although for many their deferred period will last as long as their sick pay lasts.
Once your sick pay ends you will then begin to receive your income protection insurance payments. For example, the maximum amount of time Statutory sick pay can last in the UK is 28 weeks. Therefore, once this period ends you will be moved onto your insurance payments and no longer receive sick pay from your employer.
What does income protection insurance cover?
Many income protection insurance policies will cover any illnesses or injuries that were to stop you from working. This also includes mental health conditions like depression or anxiety too.
However, policies will typically not cover:
- Any injuries or illnesses that are self-inflicted
- pre-existing medical conditions
- Alcohol or drug abuse
- Pregnancy and childbirth
- Injuries sustained in war or criminal activity
If you want to discuss your needs and find out what type of policy might be best suited for you, get in touch today.
How much does income protection insurance cost?
As every policy is different it can be hard to give rough numbers on what a policy will cost, although we can provide some factors that will influence the price of your policy.
- Your age – Therefore, the chance of you being out of work is increased, in turn increasing the cost of your policy.
- Your job – if your employment is deemed as dangerous by the insurer it could increase your premium. An example of this could be a farmer, pilot, or fisherman.
- Your medical history and current health – the better your current health, the better price you will be able to get on policies.
- How long you want your policy to last – long-term policies will cost more than short-term policies, as typically long-term policies are more comprehensive.
- How long you want your ‘deferred period’ to be – if you want to be paid as soon as possible or have a short ‘deferred period’ then your premium is likely to cost more. However, if you are able to wait a longer period, then your premium costs are likely to be lower.
- Your lifestyle – lenders may ask about certain hobbies or things you do and if they are deemed as risky your policy price could increase.
If you’re looking to start a policy but are unsure about the cost, why not get in touch today? Our team of expert advisors can discuss your circumstances and give you an idea of how much a policy might cost you.
Short-term income protection is a temporary policy that will cover your monthly earnings if you were to be put out of work due to something like an illness or injury. These injuries or illness are only likely to temporarily affect your ability to work.
Short-term policies will typically cover up to 50–70% of your monthly earnings, pre-tax.
It is usually only paid out between 12 – 60 months, although some policies can pay out for longer than this. One of the main differences between a short-term and long-term policy is this length of time, long-term polices can pay out for much longer, sometimes up until you retire.
It will cover many illnesses or injuries that prevent you from working, some include:
- Heart attacks
- Strokes
- Cancer
- Diabetes
- Broken bones or fractures
- Burns
- Spinal injuries
If you want to claim there will usually be a deferral period, like mentioned above. This is typically the length of your sick pay, although it can vary and be negotiated with your insurer.
Long-term policies are put in place in case you become seriously ill or permanently disabled. They are designed to provide cover for you if you are unable to work for a prolonged period of time or if you are never able to work again.
Like with a short-term policy, a long-term one will still cover you against accidents and illness that make you unable to work. The main difference is the length of time you are out of work for. Long-term policies commonly pay out for a term chosen by you to match your needs. However, a long-term policy will typically not pay out past the age of 70.
Again, typically between 60–70% of your monthly income will be covered and the insurance pay will start after the deferred period.
Some other differences between short-term and long-term policies that the premiums tend to be higher, as long-term polices are designed to pay out for much longer than short-term ones.
Navigating the different types of income protection insurance
This type of policy will cover your monthly mortgage payments to prevent you falling behind and having the risk of your home being repossessed.
Guaranteed income protection plans provide you with the stability of a fixed premium cost, unlike a non-guaranteed policy where your price can change when you look to find a new policy. This can allow you to budget in the long term and you also won’t have the stress of your monthly cost changing.
These policies can last for a long period of time, typically up to 25 or 30 years or until you reach the age of 70, therefore it’s unlikely that you will need to renew a policy in the short-term which can cause costs to change. These types of policies are more costly than renewable options, however in the long term it can work out cheaper as you will not need to find a new policy every time your current one ends.
Reviewable income protection insurance is almost the opposite to a guaranteed income protection policy. Reviewable policies, as in the name, are reviewed every set amount of years, meaning a lender will reassess your circumstances to determine your policy cost.
In turn, it’s likely your premium will increase as you will be older and seen as riskier by insurers.
While policies can be cheaper in the short-term, over time your policy will increase therefore it could cost you more in the long run.
Index-linked income protection is a type of income protection insurance that adjusts benefits to keep up with inflation. This helps to maintain the real value of the coverage over time, especially for long-term plans.
Index-linked income protection works by linking the benefit entitlement and monthly premium to an official index, such as the Consumer Price Index (CPI).
This means that depending on the state of the current economy, your policy could increase or decrease in price.
Do you need income protection insurance?
According to the Financial Lives 2022 survey[1] by the Financial Conduct Authority (FCA), only 6.1% of UK adults had income protection insurance. Therefore, when compared to something like the 29% of people that had life insurance in 2022, this is a small number.
While it is not essential or laws in place that mean you must have a policy, you should think about what your life would be like if you couldn’t work and wasn’t receiving any income. Everyone’s answer to this would be different, therefore we can not say if you need it or not.
Instead, this choice is up to you, and it should be thought through and not rushed. If you’re unsure about what to do and want tailored expert advice, get in touch today. Our advisors can discuss you situation during a free no-obligation consultation.
Things we are commonly asked
Yes, you can cancel your policy by contacting your lender and referencing your policy number and personal details.
Once a policy has started, you usually have 30 days to cancel and get a full refund, however after this 30-day period what you are refund is likely to be less. Each insurers terms and conditions will be different, so it’s best to check with them before starting a policy.
If you’re struggling with payments contact your insurer as soon as possible, as they will be able provide you with specialist support.
Yes, having multiple policies running simultaneously is possible. Although, this doesn’t mean that you will get the percentage of your income paid out twice.
Instead, you will need to notify insurers that you have an existing policy, in turn they will be able to work the share of money they would pay out if you claimed on your policy.
For example, if you had two policies, then they would both pay 30% each monthly for a total of 60% of your monthly income. Rather than them both paying 60% each and you having over what you would earn monthly.
