Income Protection Guide
Income protection insurance is a long-term insurance policy to help you if you can't work because you're ill or injured.
- It replaces part of your income if you can't work because you become ill or disabled.
- It pays out until you can start working again, or until you retire, die or the end of the policy term - whichever is sooner.
- There's a waiting period before the payments start. You generally set payments to start after your sick pay ends, or after any other insurance stops covering you. The longer you wait, the lower the monthly payments.
- It covers most illnesses that leave you unable to work, either in the short or long term (depending on the type of policy and its definition of incapacity).
- You can claim as many times as you need to, while the policy lasts.
Do you need it?
According to the ABI, one million workers a year find themselves unable to work due to a serious illness or injury.
It doesn't matter whether or not you have children or other dependents – if illness would mean you couldn't pay the bills, you should consider income protection insurance.
You're most likely to need it if you're self-employed or employed and you don't have sick pay to fall back on.
Check what your employer will provide for you if you're off sick.
Who doesn't need it?
You might not need income protection insurance if:
- You could get by on your sick pay – for example if you have an employee benefits package which gives you an income for 12 months or more.
- You could survive on government benefits – but they might not be enough to cover all your outgoings.
- You have enough savings to support yourself – remember that your savings may need to see you through a long period.
- You could take early retirement – if you're near retirement age, perhaps you could afford to retire early. If you are unable to return to work you may be entitled to take your pension early.
- Your partner or family would support you – perhaps your partner has enough income to cover everything the two of you need.
Choosing a Policy
If you become too ill to work and have the right income protection insurance policy you will receive an income until the policy expires. Picking the right cover means matching your needs and personal circumstances to the best policy available.
Income protection policy features
Income protection policies might seem complicated, but it's important to understand what you're signing up to. In this guide we've highlighted the main parts for you to look out for.
Level of cover
Income protection insurance replaces part of your income if you become unable to work because you're ill or injured. You can choose from three main levels of cover, which pay out based on your situation:
- Own occupation: you can't do your own occupation.
- Suited occupation: you can't do your own job or a similar one that suits your qualifications and experience.
- Any occupation: you're too ill to do any kind of work.
For example, if you were a surveyor and needed to physically inspect various properties, any condition that stopped you walking would be eligible for a claim under an ‘own occupation' plan. But, under an ‘any occupation' plan, the insurer wouldn't pay out, because you'd still be able to do some types of work.
Most complaints about income protection insurance are about whether or not a consumer meets the definition in their policy. An ‘own occupation' definition – when the policy pays out if you are unable to do your own job – makes it more likely that you will make a successful claim.
Length of pay out
Your policy will only pay out up to a maximum stated limit. The maximum length of time will be to the expiry date of the policy, usually set to tie in with your retirement date, the day your children finish full time education, or the length of your mortgage. There are also policies that pay out for a fixed period such as five years and these will be less expensive.
If, following a claim you return to work, but then shortly afterwards fall ill with the same complaint, the insurer will regard this as a continuation of the first claim and pay benefit straight away.
You can claim many times under the same policy if you are off work repeatedly due to ill health.
Amount of pay out
You can choose a policy which pays out a set amount to cover particular bills and outgoings, or you can cover a percentage of your income. If when you claim you are still receiving an income, for example through your employer's sick pay scheme, the amount of benefit will be reduced.
Hospitalisation benefit is a cash payment available under some policies for each night that you spend in hospital, typically after the first seven days.
Some income protection policies give you the choice of a fixed, or guaranteed premium. This means that you will always pay the same sum every month during the policy. While this can cost slightly more in the short-term, many people like the security of knowing what they'll be paying in future.
Alternatively you might think about premiums that can be reviewed from time to time – where rates are typically reconsidered every five years. The initial cost tends to be lower, but can rise over time and is influenced by:
- Your age
- Medical advances
What you need to think about before buying income protection insurance?
Factors that influence the cost
- Job – the more manual or specialist the higher the cost
- Health (your current health, your weight, your family medical history)
- Whether you smoke or have previously smoked
- The definition of disability – own occupation, suited occupation or any occupation (see above)
- The amount you want to cover
- How long you want to be covered (the term)
- The excess waiting period before you are paid (deferred period)