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What is income protection insurance and do I need it?

Income protection insurance can be invaluable if you cannot work due to disability or illness.

But it's worth considering what is covered and the factors that can impact your monthly premium before taking out a policy.

Summary

  • Income protection insurance covers you when you can't work due to an accident or illness

  • There are five different types of income protection insurance

  • You’ll usually be entitled to an average of 50% to 70% of your current monthly take-home pay

  • The cost of an income protection insurance policy can be as little as £10 a month

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What is income protection insurance, and how does it work?

Income protection insurance is similar to health, life or critical illness insurance.

It’s a financial safety net that can be used when you can’t work due to a qualifying accident or illness. 

Unlike critical illness cover, income protection cover isn’t paid as a lump sum.

Instead, it's paid as an ongoing replacement income for the length of your insurance term.  

This income is usually around 50% to 70% of your regular income, although the exact amount will depend on the level of coverage you choose and your provider. 

Usually, the coverage you get is linked to your earnings, but it can be a bit more complex if there are limitations

LV=, for example, offers a maximum benefit of 60% of your income.

Meanwhile, the British Friendly Society offers a maximum benefit of 65% up to £60,000 per annum, but this falls to up to 45% for income over £60,000.  

It’s also important to stress that income protection insurance usually has a deferred period, which is the time between when you stop working and when you start receiving your benefit. This is typically at least a few weeks. 

Emergency savings and other insurance policies may be used to handle immediate expenses, but income protection can keep you going over long periods spent out of work.  

What are the different types of income protection insurance?

There are five different types of income protection insurance, including: 

  • Short-term: This type of insurance policy usually covers a period of five years or less and will stop paying out when that term is over, regardless of whether you’re able to return to work. These policies aren’t as comprehensive as the alternatives and have lower monthly premiums.  

  • Long-term: This is the more expensive, comprehensive option. Long-term income protection insurance will cover you until you reach retirement age or return to work, whichever happens first. For example, if you receive a permanently disabling injury at the age of 30, a long-term policy could provide you with a regular income for over 30 years. 

  • Occupation specific: For an increased premium, you could get income protection insurance with special terms around your job. Own occupation policies, for example, allow you to claim replacement income if you can’t do your specific job anymore, rather than being unable to work.  

  • Guaranteed premium: Your monthly premium is set in stone for the length of your term if you have a ‘guaranteed’ policy. This means you’ll know what you’ll be paying and won’t encounter price hikes, but it also means the amount will start higher compared to other policies.  

  • Reviewable/age-banded premium: Reviewable premiums can be adjusted regularly during your insurance term. Age-banded premiums tend to increase annually as you age, meaning they’ll grow in price.  

What does income protection insurance cover? 

While this is not comprehensive, income protection insurance will usually cover mental health conditions like depression, stress and anxiety, serious illnesses and medical issues, as well as musculoskeletal problems.  

Income protection will usually not cover loss of income due to an injury caused by self-harm, certain pre-existing medical conditions and the inability to work for non-medical reasons such as redundancy.  

These policies typically cover most medical illnesses and issues that leave you unable to work and can be claimed as many times as necessary.  

How much income protection insurance do I need? 

As we’ve mentioned, you’ll usually be entitled to an average of 50% to 70% of your current monthly take-home pay (or net profit if you’re self-employed). 

This is your maximum, but depending on your financial situation, it might be more than you need to cover monthly expenses if you can’t work. 

In this case, you can select your chosen entitlement amount, and your premiums will be adjusted accordingly.  

It’s worth asking: 

  • What are my essential monthly expenditures? 

  • Can I supplement my income protection insurance with other savings or benefits? 

  • Will specific exclusions or conditions that aren’t covered impact me? 

  • How long of a deferred period am I comfortable with? 

  • How much time do I need my income protection to cover? 

If this reveals that income protection insurance won’t be sufficient for your financial situation, consider your alternatives and look at how to supplement a protection policy with income from investments and savings.  

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How much does income protection cost?

When it comes to income protection insurance, cost is the biggest consideration for most people. 

According to the Financial Conduct Authority’s Financial Lives Survey (2022), only 6% of people in the UK have an income protection policy, and many cite the cost of having such a policy as a key reason.  

But it might cost you less than you expect to benefit from this kind of protection, with younger people often able to access premiums of under £10 a month. 

Overall, the cost of an income protection insurance policy can be as little as £10 a month, but this depends on many factors, including your age, health, hobbies and lifestyle and your risk level at work. 

Your level and type of coverage, the length of your deferred period and whether or your premiums are guaranteed or fixed at one price for the length of the term can also impact how much you’ll pay. 

Who are the best income protection insurance providers?

When researching the best income protection insurance providers, there’s a lot to consider. 

So, it’s worth: 

  • Comparing how much you ideally need each month to the maximum amounts and income percentages a provider offers. 

  • Looking at how your provider considers personal and lifestyle factors that may increase your premium. 

  • Speaking with a qualified insurance broker about your options. 

  • Checking customer reviews to see if an insurance company offers good customer service. 

Wesleyan Insurance Society, LV=, British Friendly Society and Shepherds Friendly Society are a few examples of providers that are rated highly and recommended by customers, according to Trustpilot. 

The drawbacks and benefits of income protection insurance

The advantages of income protection

The disadvantages of income protection

It’s suitable for various people, including individuals, groups, and the self-employed

It often won’t cover pre-existing medical conditions. If they are, policies are pricier. 

It can provide longer-term protection compared to critical illness cover

The policy won’t usually instantly replace your income due to the deferred period. 

The policy often covers additional costs related to an injury or medical issue. 

It excludes certain injuries and issues, e.g., self-inflicted injuries are often not covered. 

Income protection offers peace of mind. 

Some policies get more expensive with age, making it costly to get a policy in later life.  

To find out whether income protection is right for you, ask yourself, primarily, whether it will cover your expenses in a worst-case scenario and whether you can afford the monthly premiums. 

If you’re unsure how to find the best income protection policy, Unbiased can connect you to a qualified insurance broker.

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About the author
Our team of writers, who have decades of experience writing about personal finance, including investing, retirement and pensions, are here to help you find out what you must know about life’s biggest financial decisions.