What is income protection?
Income protection is an insurance policy that provides financial support if you're unable to work due to a medical condition.
By making monthly payments (premiums), you are entitled to a tax-free monthly benefit if you need to make a claim. Conditions such as long-term back pain, cancer, depression, and strokes are common reasons for claims, and you can make multiple claims throughout the policy term. Income protection offers more long-term financial security than standard sick pay.
How does income protection work?
When considering income protection, several factors will influence your monthly premium:
- Monthly benefit amount: The amount you would receive in the event of a successful claim, typically up to 55% of your pre-tax income.
- Benefit payment duration: You can choose between short-term policies, which pay out for a limited period, or long-term policies, which provide benefits until you return to work or retire.
- Benefit amount adjustment: Whether the payout remains the same or increases over time (indexed to inflation).
- Policy term: The length of the policy, which could cover an agreed number of years or extend until your retirement age.
- Whether the premiums are:
- Guaranteed - is where you pay a fixed amount each month, or it increases only with inflation. This is the recommended type of premium.
- Reviewable - means that your monthly payments can increase over time, based on factors such as the insurer’s review of market conditions or their claims experience.
The waiting or deferred period refers to how long you must wait before your income protection payments begin. Common waiting periods are 1, 4, 8, 13, 26, or 52 weeks. The longer the deferred period, the lower your monthly premium. However, keep in mind that during this time, if you are unable to work, you may have no other income and could need to rely on a partner or use savings.
Additionally, your age, medical history, and whether you are a smoker will also influence your monthly premium, with higher risks leading to increased costs.
Short-term vs long-term income protection
When selecting income protection, one key decision is whether to opt for a short-term or long-term policy..
Short-term income protection
With short-term income protection, your coverage is limited to a set period per claim, typically between 2 to 5 years. Even though there is a maximum time limit per claim, you can make multiple claims under the same policy, even if they relate to the same illness or injury. This type of cover is more affordable than long-term income protection, making it an attractive option for those looking for lower premiums with some financial protection.
Long-term income protection
Long-term income protection provides benefits for the entire length of the policy term. This means you will continue receiving payments for as long as you're unable to work and remain eligible, up to the policy’s expiry, which could be until retirement. Like short-term cover, you can make multiple claims throughout the policy term, offering more comprehensive protection compared to short-term income protection.
What if I'm over 50?
The typical maximum age for taking out income protection insurance ranges between 54 and 64. While this varies depending on the insurer, it's generally advisable to take out a policy earlier to secure lower premiums and ensure coverage during your working years.
The policies can typically run until retirement age, with some UK insurers offering cover beyond 68 years old. This allows you to maintain financial protection during your working years and even into later stages of your career, depending on your needs and the insurer’s terms.
How are income protection claims assessed?
Most unsuccessful income protection claims result from misrepresentation during the application process. To avoid having a claim denied, it is essential to provide honest and accurate information.
When assessing an income protection claim, insurers base their decision on your ability to perform the duties of your job, referred to as the 'definition of incapacity.' This can vary significantly depending on the nature of your role, such as how physical or stressful it is, and is referred to as your 'own occupation definition.'
If you are unemployed at the time of your claim, insurers will assess other factors, such as your ability to perform activities of daily living (ADL), like using a car or walking.
It's important to note that income protection only covers loss of earnings due to illness or injury—it does not account for loss of income from non-health-related causes, such as redundancy.
You may also find exclusions in your income protection policy, such as an inability to work due to self-harm or other exclusions tailored to your specific medical history. It's essential to review your policy carefully to understand any conditions that might not be covered, ensuring you're fully aware of any limitations.
Do I need income protection insurance?
When considering income protection insurance, it's important to ask yourself the following questions:
- Do you rely on your salary to cover daily living expenses, such as your mortgage or bills?
- Could you continue covering these expenses if you were unable to work due to illness or injury?
- What are your sick pay entitlements from your employer, and how long can you depend on them? (In the UK, statutory sick pay is currently £94.25 per week for up to 28 weeks.)
- Do you have savings or other sources of income to rely on if you're unable to work?
- Could you reduce your expenses while you're unable to work?
These questions can help determine whether income protection insurance is necessary to maintain your financial security during periods of illness or injury.
When is the best time to get income protection?
Certain life events often prompt people to consider income protection insurance, though it's worth noting that the younger and healthier you are, the cheaper your cover will be.
Common reasons include:
- Taking on a mortgage, getting married, entering a civil partnership, or having a child.
- Becoming self-employed for the first time and losing access to employer-provided sick pay.
- Personal experience, such as witnessing a friend or relative unable to work due to illness or injury, and seeing them struggle financially.
These situations highlight the importance of financial protection against unforeseen circumstances.
Income Protection for the self-employed
Income protection can be especially important for the self-employed, as they do not have access to employer-provided sick pay.
If you are self-employed and unable to work due to illness or injury, the financial impact may be felt more quickly compared to those in employment, making income protection crucial for maintaining financial stability during such periods.
Income protection or critical illness cover?
It is common to confuse income protection with critical illness cover; however, there are some key differences:
Critical illness cover
- has a pre-defined list of conditions and illnesses that are covered under the policy.
- Provides a lump sum payout to help support you and your family financially during a challenging time, offering peace of mind if you're diagnosed with a serious illness.
Income protection
- pays out if you are unable to perform your job for any medical reason. Unlike critical illness cover, there is no pre-defined list of conditions—it covers anything that medically affects your ability to work.
- typically pays a proportion of your salary, to help maintain your financial stability during the period you're unable to work.