INCOME PROTECTION INSURANCE
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What Is Income Protection insurance
Income protection insurance is a form of insurance that provides individuals with financial assistance in the event of a sudden loss of income due to illness, or injury.
It is designed to replace lost income and help to cover the costs of living, including paying mortgage payments and rent, food, transport and bills.
Income protection insurance can be taken out as an individual policy or as part of an employer group plan.
The amount and period of time for which benefits are payable under these policies vary depending on the type of policy purchased.
It is important for individuals to understand their needs before purchasing an income protection policy so that they can make an informed choice about the right level of cover.
Ultimately, income protection insurance can provide peace of mind should individuals ever find themselves in need of financial support due to unexpected illness and being unable to work.
Types Of Income Protection Insurance
- Long-term income protection insurance: Also known as permanent health insurance (PHI), this type of policy provides a regular income if the policyholder is unable to work due to illness or injury until retirement age or the end of the policy term, whichever is sooner. It typically pays out a percentage of the policyholder’s pre-disability income, usually ranging from 50% to 70%, and can provide a tax-free benefit.
- Short-term income protection insurance: Also known as accident and sickness insurance, this type of policy provides a regular income for a specified period of time, typically ranging from 1 to 5 years, if the policyholder is unable to work due to illness or injury. It usually pays out a percentage of the policyholder’s pre-disability income, often up to 70%, and can also provide a tax-free benefit.
- Mortgage payment protection insurance: This type of policy specifically covers the policyholder’s mortgage repayments in case of illness, injury, or disability. It typically pays out a fixed amount to cover the mortgage repayments for a specified period of time, usually up to 2 years.
- Executive income protection insurance: This type of policy is designed for high-earning individuals and provides a higher level of income replacement, often up to 80% of their pre-disability income. It may also offer additional features such as rehabilitation support and guaranteed insurability options.
- Group income protection insurance: This type of policy is typically provided by employers as part of an employee benefits package and covers a group of employees. It offers income protection benefits to employees who are unable to work due to illness or injury, and the benefit amount is usually a percentage of their salary.
How Much Does Income Protection Cost?
The cost of income protection insurance can vary depending on various factors, including
- The policyholder’s age
- Health, occupation
- Cover amount
- Policy term
- Deferred period
In general, income protection insurance premiums are calculated based on the level of coverage desired and the perceived risk of the policyholder becoming unable to work due to illness or injury.
As a rough estimate, the cost of income protection insurance is typically around 1-3% of the policyholder’s gross annual income. However, this can vary widely based on the factors mentioned above. For example, policies with higher coverage amounts, longer benefit periods, shorter waiting periods, and coverage for high-risk occupations may generally have higher premiums. Additionally, policyholders who are older or have pre-existing health conditions may also face higher premiums due to increased risk.
It’s important to note that while income protection insurance premiums may seem like an additional expense, the financial protection it provides can be invaluable in the event of an unexpected illness or injury that leaves you unable to work and earn an income.
How much does income protection pay out?
Typically, income protection insurance policies provide a percentage of the policyholder’s pre-disability income as the benefit amount, which is paid out on a regular basis (usually monthly) during the period of disability or incapacity.
The percentage of income that is paid out as a benefit can vary, but it typically ranges from 50% to 70% of the policyholder’s pre-disability income. For example, if the policyholder’s pre-disability income is £3,000 per month and the policy has a benefit percentage of 60%, the monthly benefit payout would be £1,800 (i.e., 60% of £3,000).
It’s important to note that the benefit amount is usually subject to a maximum limit, which is set when the policy is purchased. This limit is typically based on the policyholder’s income at the time of application and may be expressed as an absolute amount or as a percentage of their pre-disability income.
The difference between income protection insurance and accident sickness and unemployment insurance (ASU)
Income protection insurance and accident sickness and unemployment (ASU) insurance are two different types of insurance policies that provide financial protection in case of disability, illness, or unemployment. Here are the main differences between the two:
- Coverage: Income protection insurance is designed to replace a portion of your income if you become unable to work due to illness or injury, regardless of the cause. It typically provides coverage for a longer period of time, ranging from a few years to retirement age, depending on the policy terms. ASU insurance, on the other hand, typically provides coverage for a shorter period of time, usually up to 12-24 months, and is specifically designed to cover accidents, sickness, and unemployment (e.g., job loss).
- Benefits: Income protection insurance generally pays out a percentage of your pre-disability income as a monthly benefit, while ASU insurance may provide a lump sum or monthly benefit for a limited period of time in case of accidents, sickness, or unemployment. Income protection insurance typically provides a more comprehensive coverage for various types of illnesses, injuries, or disabilities that may prevent you from working, whereas ASU insurance may have more limited coverage focused specifically on accidents, sickness, or unemployment situations.
- Waiting Period: Income protection insurance policies often have a waiting period or elimination period, which is the period of time that you must be disabled or unable to work before the benefit payments start. Waiting periods for income protection insurance policies can vary from a few weeks to several months. ASU insurance policies may also have a waiting period, but it is typically shorter, ranging from a few days to a few weeks.
- Premiums: The premiums for income protection insurance are typically based on factors such as your age, health, occupation, coverage amount, policy term, waiting period, and other individual factors. ASU insurance premiums may also depend on similar factors, but they may be relatively higher compared to income protection insurance premiums due to the more limited coverage and shorter benefit periods.
- Coverage for Unemployment: ASU insurance specifically provides coverage for unemployment, which is not typically covered by income protection insurance. ASU insurance can provide a benefit to help cover your financial obligations, such as mortgage or loan payments, in case you lose your job due to circumstances beyond your control, such as redundancy or layoff.
You can find out more about our ASU policies and costs here.
Is Income Protection right for me?
Income protection can be expensive, but in the event of an illness or injury, it could be the only thing that keeps you housed and fed.
- Income stability: If your income is essential to meeting your financial obligations and maintaining your lifestyle, income protection insurance can provide a valuable safety net in case you are unable to work due to illness or injury. It can help replace lost income and provide financial security during a period of disability or incapacity.
- Dependents or financial responsibilities: If you have dependents or financial responsibilities, such as a mortgage, loans, or other financial obligations, income protection insurance can help ensure that you can continue to meet those commitments even if you are unable to work due to illness or injury.
- Savings and emergency fund: If you have substantial savings or an emergency fund that can cover your living expenses for an extended period of time in case of disability, you may have a lower need for income protection insurance. However, it’s important to carefully evaluate your savings and emergency fund to determine if they are sufficient to provide adequate financial protection in case of a prolonged disability.
- Employer benefits: Check if your employer provides any income protection or disability benefits as part of your employee benefits package. If you already have such coverage, it may affect your decision on whether to purchase additional income protection insurance.
- Health and lifestyle: Consider your health condition, lifestyle, and any pre-existing health conditions that may affect your ability to work in the future. If you have a higher risk of becoming disabled due to health factors, income protection insurance may be more important for you.
- Budget: Evaluate your budget and determine if you can afford the premiums associated with income protection insurance. Premiums can vary depending on factors such as coverage amount, policy term, waiting period, and other factors. Make sure to factor in the cost of premiums when assessing if income protection insurance is right for you.
It’s also recommended to review and compare policies from different insurance providers, carefully read the terms and conditions, and consider seeking advice from a qualified insurance professional who can provide personalized recommendations based on your specific circumstances.
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Income Protection Insurance FAQ
Theoretically, you can take out as many income protection policies as you like. However, you will be limited to only being able to cover a set percentage of your income. You can’t change this by taking out more policies and you need to make sure that you don’t exceed the max allowed.
If you do make a claim, you will be asked whether you have a continuing income. This does include any other insurance policies that you have taken out. If you have multiple insurance policies then this will impact the level of cover that you are provided. Depending on the plan you choose you may be able to cover up to 65% of earnings and you can do this across multiple plans.
The amount of time income protection is paid for will differ depending on your policy. Short term policies will cover anything from a couple months to a couple years. In contrast, long term policies will typically continue to payout until you retire or until you are able to return to work. It’s important to discuss the length of the policy when you are applying for this type of coverage. You need to make sure that the length of coverage suits your needs.
There are multiple ways to compare income protection policies. You can use a comparison website like compare the market. One of the great advantages here is that you can arrange for the companies with the best quotes to contact you directly. You can also contact companies individually and ask for an income protection quote. Make sure that you research the best companies and pay particular attention to customer care standards. It’s important that you find a business which will offer the full support you need.
Income protection is designed to provide cover for any illness or injury that means you are unable to work. As such, if you suffer a disability that means you are unable to work, you will be able to claim on this insurance plan. However, this will only provide coverage for the length of the plan you have taken out. Long term insurance plans can continue to pay until you retire, pass away or reach an age that is set in the policy terms. As such, it is possible to arrange a plan that will cover a disability which means you are unable to work for the rest of your life. It is also possible to claim an existing disability that has gradually become worse and left you unable to work. Be aware that insurance protection plans will often include you providing information on any illnesses or disabilities that you already suffer from. This will impact the premium for your coverage. You may also find that certain permanent disabilities are not covered as part of specific plans. This is another detail you should enquire about when exploring different income protection quotes.
Income protection insurance covers a wide range of illnesses. The types of illnesses that are covered will differ depending on the policy and the company that you choose. However, you could get cover for anything from illnesses caused by stress to a serious heart condition. Essentially, if an illness means that you are unable to work, then it will be covered under your plan. So, you could have back cancer that means that you are unable to sit at a desk all day or you might be suffering from RSI. Illnesses and conditions like this will typically be covered. However, it is worth asking about what illnesses are covered before taking out a policy. The full list of illnesses covered can differ from company to company.
Income protection insurance will not impact your sick pay. Instead, the insurance is designed to provide cover once the sick pay ends. Employees differ on how long they will provide financial support to an employee who is injured or has fallen ill. The longer you are provided sick pay, the longer you will be able to hold off claiming on your insurance coverage.
You can not claim income protection if you are working. Income protection insurance is specifically designed to provide support during a time when you are unable to work. You will face serious issues if you attempt to claim while you are still able to work and thus earn a full income. Theoretically, you may still be able to earn some form of income and claim on your coverage. However, this will drastically impact the level of payout that you receive.
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Further Reading
Key Person Income Protection Insurance
As a director you can take out income protection through the company. Read more here.
Self Employed Income Protection
Check out our guide on self employed income protection insurance here.
Accident & Sickness Insurance
Cost effective protection for yourself and your family in the event of illness or accident.
My Key Man Insurance
UK’s Number One Business Protection Specialist.
