Income Protection Explained

author image-crispin
By Crispin Bateman
Updated on Friday 5 June 2020

Multi coloured umbrella standing out from the black ones

Sitting quietly in the background of life insurance is an under-utilised product called Income Protection Insurance (IP). It’s a type of insurance policy that many people have never heard of, but it can be very beneficial to those looking to protect themselves against a loss of income if ever they're unable to work.

Over a million people in the UK find themselves unable to work through injury or illness each and every year, but income protection cover will help ease the financial stress if ever you suffer such unfortunate circumstances.  

Covered in this article:

What is income protection and what does it cover?

Is IP insurance worth it?

Do I need income protection?

Income protection FAQs

Getting an income protection quote

What is income protection insurance?

Think of income protection as a type of sickness pay. It is an insurance policy that covers your income should you find yourself unable to work due to illness or an injury.

Having a good level of employee-provided sickness pay is becoming rarer and companies often  rely on the government statutory sick pay (SSP) scheme to provide you with some sort of income if you fall ill or become injured

Unfortunately, SSP has many problems and the amount of money it provides is rarely sufficient, so those without an employee-provided sickness pay scheme or income protection insurance usually find themselves in financial difficulty if ever they are out of work due to an illness or accident.

How much is statutory sick pay?

SSP currently stands at a maximum of £94.25 per week, which is hardly enough to cover the bills and needs of a family if the main breadwinner falls ill and suffers a loss of income.

It is proposed to increase to £95.85 on the 6th of April 2020, but that is still unlikely to be sufficient for the needs of most people in the UK, especially those with dependants, and many will struggle without an adequate income protection policy 

The main features of income protection insurance include the following:  

  • It replaces a percentage of your income if you’re unable to work due to illness, injury or disability. 
  • You will receive payments until you can start working again, or until you retire, die, or the policy comes to an end, depending on which comes first. 
  • There is usually be a waiting period (also known as a deferred period) before payments start (after your sick pay ends, for example).  
  • Most illnesses and injuries that leave you unable to work are covered (make sure you fully understand what your policy covers you for). 
  • While the policy is active, you can claim as many times as you need to, provided you meet the terms of your policy.

Is income protection insurance worth it?

The first thing you must consider before taking out income protection insurance is whether you currently have any other forms of protection with your employer beyond SSP. There are typically three factors you need to consider:

  • The amount of your salary that will be paid to you if you're off work

  • The waiting period (number of days before the income protection policy kicks in)

  • The maximum term (how long you're covered for)

Using the government SSP as an example, the answer would be:

  • £94.25 per week

  • The first three days of sickness are not covered

  • You can receive SSP for a maximum of 28 weeks

A good work package may offer:

  • Your entire salary for the first three months, then 60% of your salary for the following nine

  • Starts immediately

  • Lasts for a year

Employer sick pay schemes are entirely at the jurisdiction of your employer. There is no legal requirement for them to offer anything above SSP, and anything extra that is in your contract is a perk which comes with the job.

Read more: What is a Remuneration Package? 

Income protection insurance offers a sliding scale based on your personal requirements, but might typically stack up as follows:

  • 65% of your salary before tax in addition to any other sick pay scheme.

  • Waiting period determined by you when initiating your policy, from 0 days to 2 years.

  • Several years of cover with long-term income protection (depending on your policy).

As with most forms of personal insurance, you can get a better policy with a lower deferred period simply by being willing to pay more on your premiums.

The exact terms within your policy will vary in relation to the provider and the level of cover you choose, but expect to pay slightly more in premiums if you want more extensive protection.

Do I need income protection?

Income protection insurance is not for everyone. If you are satisfied with your work sick pay scheme, or even with the government's statutory sick pay, then you may not need this additional level of salary protection.

You may also have considerable savings you are willing to dip into, a secondary income, or you might be able to consider the government-provided benefits to cover you during any period of illness.

If the loss of your earnings would have significant impact on your financial stability, however, then you may want some level of loss of income insurance.

Income protection insurance for self-employed people

Income protection is particularly valuable to the self-employed. The benefits of income protection insurance for someone who could lose their entire business with a prolonged period off work are plentiful.

Why? Because when you're self-employed, you are not entitled to any government-backed SSP and will have no employer-based sick pay scheme in place – income protection insurance becomes your main backup in these instances.

Without an adequate self-employed income protection policy in place, the entire business could collapse and you (and any dependants you have) could end up in a financial nightmare.

Income protection FAQs

At Compare UK Quotes we get many questions from our customers. Here are some of the more frequently asked questions regarding income protection:

Are there different types of income protection insurance?

Like all insurance products, income protection is very customisable and you can often get cover tailored to your specific needs.

For example, you can get short-term income protection policies to cover minor injuries or sicknesses with no waiting period that pay you for a maximum of three months, or you might prefer a long-term policy with a longer start period but many years of payments while you’re unable to work. 

The best income protection insurance is one that is tailored to your personal circumstances, so always be sure to explain your exact situation and needs to your insurer when discussing your policy.

Does income protection affect benefits?

Yes, your income protection can have an impact on state benefits.

If you are claiming any state benefits, such as housing benefit, they will take your income provided by the insurance into account before calculating any benefit payment.

Is income protection the same as PPI?

No. We can't stress enough that income protection (IP) is completely separate from payment protection insurance (PPI), despite the similar looking acronyms!

PPI wasis widely mis-sold (which is why you hear about PPI claims all the time). It only covers a particular debt and any pay-outs go to your lender, while IP provides you (the policyholder) with a tax-free proportion of your income if you’re ever unable to work due to illness or injury. 

Is income protection the same as critical illness cover (CIC)?

There are some similarities between critical illness insurance (CIC) and income protection (IP), but there are three main differences:

  • IP assumes you will return to work after recovery, CIC does not.

  • CIC is a single large payout, IP pays monthly to replace a regular income.

  • IP can come into effect no matter the reason for time away from work, CIC only applies in very specific circumstances.

Though both income protection and critical illness cover are products you would typically buy from a life insurance broker, CIC is much more tied into your life insurance policy and you would usually purchase it alongside level-term or decreasing-term life insurance. Income protection is a separate product that has no real tie to life insurance.

Read more: Term Life Insurance Explained 

How long until you can claim IP?

You are rarely able to claim income protection payments immediately when you become unable to work you are often required to wait a minimum of around four weeks, depending on your policy.  

It is highly likely that your  income protection insurance will have a waiting (or offset/deferred) period. During this time, you must rely on other financial support until your IP starts. Having a longer waiting period substantially lowers the price of your premiums, but be sensible with the timescale you set. 

How much is income protection each month?

Income protection typically provides monthly payments into your bank account equal to 65% of your salary, but the actual figure is far closer to your typical monthly payment, because IP is tax-free.

For example, if you were to earn £25,000 p.a., your monthly 'take-home' pay (after tax and NI) would be £1,711.32. An income protection payment of 65% gross is £1,354.17 – a difference of just over £350.

Someone on £50,000 p.a., would typically take-home £3,127.99 per month. In this situation, a 65% IP payment would be £2,708.34 – less than £420 difference.

How much does income protection cost?

Monthly income protection payments (or premiums) vary considerably between each policyholder, but the most basic policies can start from as little as a few pounds a month.  

Similarly to life insurance, the cost of your income protection policy depends on a variety of factors, including your 

  • Age  
  • Marital status 
  • Smoking status 
  • Lifestyle choices 
  • Current health  
  • Medical history  
  • Occupation 

The amount of cover you need depends on your income, day-to-day living costs, debts and monthly expenses (mortgages and rents). The more financial commitments you have, the more income protection cover you will need.  

Getting an income protection quote

Income protection insurance is a tailored product where it is always beneficial to retrieve quotes from as many providers as possible.  

For this reason, we would suggest working through a life insurance advice and broker service, who can provide you with a whole range of life insurance and related products – including income protection insurance. 

Shop around for IP quotes with as many providers and brokers as you feel is necessary, until you find the best and most affordable deal for your personal situation.  

It’s shouldn’t be a case of simply choosing the cheapest policy you come across – you need to ensure that your income protection insurance works for you and that it covers you for all relevant eventualities.   

For more information on personal insurance, take a look at our  articles on life insurance  and associated financial products. 

Remember, before taking out income protection insurance, it is worth finding out about how an index-linked policy can benefit you.

life insurance protection advice specialist insurance critical illness cover income protection sick leave sick pay statutory sick pay SSP too ill to work SSP allowance IP income protection benefits

Latest News