Income Protection Explained

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By Crispin Bateman

Updated on Tuesday 26 February 2019

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Sitting quietly in the background of life insurance is an under-utilised product called Income Protection Insurance (IP). It’s a level of insurance that most people have never heard of but it can be very beneficial.

Here at Compare UK Quotes, we want to bring you the best financial advice and that includes looking at some of the little-known finance packages available to you.

What does income protection mean?

Is IP insurance worth it?

Who should get income protection?

Income protection FAQs

How do I choose IP?

What does income protection mean?

Income protection is a type of sickness pay. It is insurance 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 often, companies rely on the government statutory sick pay (SSP) scheme to provide you with some sort of income if you fall ill, but SSP has many problems – not the least of which is that the level of cover it provides is incredibly small.

At the time of writing this article, SSP stands at a maximum of £92.05 per week, which is hardly enough to cover the bills and needs of a family if the main breadwinner falls ill.

Is income protection insurance worth it?

The first thing you must consider before opting to look at income protection is whether you currently have a form of cover with your employer beyond SSP. There are typically three factors you need to consider:

  • The amount of your salary that will be paid

  • The waiting period (number of sick days before the sick pay kicks in)

  • The maximum term

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

  • £92.05 per week

  • The first three (3) days of sickness are not covered

  • You can receive SSP for a maximum of 28 weeks

A good work package may be:

  • 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 (something that probably enticed you to take it).

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.

  • Many years with long-term IP, determined by your policy choice

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

Who should get income protection?

Income protection insurance is not for everyone. If you are satisfied with your work sick pay scheme, or even with the 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 even consider the government-provided benefits enough 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 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 manifold. When 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.

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. There are short-term income protection policies that might be worthwhile to cover minor injuries or sicknesses with a zero-day waiting period and payment that only lasts for three months, and conversely long-term income protection systems with a larger offset start period but provision for many years’ payment to cover a more serious illness.

The best income protection insurance is one that is tailored to your personal circumstances.

Does income protection affect benefits?

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

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

Is income protection the same as PPI?

No. Income protection (IP) is completely separate from payment protection insurance (PPI), despite the similar looking acronyms!

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

There are some similarities between CIC and IP, however 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.

How long until you can claim IP?

Depending on the policy you set up, your income protection will have a waiting, or offset 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.

How much is income protection each month?

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

For example, if you were to earn £25,000 p.a., your monthly take-home pay would be £1,698.41. An income protection payment of 65% gross is £1,354.17 – a difference of under £350.

Someone on £50,000 p.a., would take-home £3,567.71 typically. In this situation, a 65% IP payment would be £3,250 – again, less than £350 difference.

How do I choose income protection?

At Compare UK Quotes, we scour the UK for some of the best deals. Income protection insurance is a very tailored product where quotes from multiple sources are a huge advantage. For this reason, we would suggest working through a life insurance advise and broker service. We recommend the life insurance brokers at Quick Quote Life Ltd., who can provide you with a whole range of life insurance and related products – including income protection.

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

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