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Income protection insurance is a policy that gives you a regular, tax-free monthly income if you find yourself out of work, due to illness, injury, or, in some cases, redundancy.

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Protect against lost income
Protect against lost income

How does income protection insurance work?

Serious illnesses and accidents that put you out of work can be stressful, expensive, and life-altering. An income protection policy can minimise the disruption, ensuring your family still has money coming in as you recover or adjust to your new life.

Long-term policies

Deliver a regular monthly income following an injury or accident. These benefits last either until you’re ready to return to work, until you reach retirement age or die, or until the policy expires.

Short-term policies

Deliver monthly payments for a set period of time, usually six months to two years, and can also cover redundancy, in addition to accident and illness. Short-term policies can be pegged to repayments on a specific debt, such as a mortgage.

Types of Income Protection Insurance

Long-term income protection policies

Long-term income protection policies

Policies which deliver monthly pay-outs of between 50% and 70% of your previous salary if you’re unable to work due to illness or injury. Payments last until you’re able to work again, you reach retirement age, you die, or they expire—whichever comes first. Previously called permanent health insurance, these policies don’t cover redundancy.

Short-term income protection policies

Short-term income protection policies

Policies which deliver monthly pay-outs for a set period of time—usually 12 months but sometimes up to two years— if you lose your job due to accident, sickness, and/or involuntary redundancy.

Alternatives

Alternatives

Short-term income protection policies pegged to specific debts.

How much does income protection insurance cost?

Monthly premiums for income protection insurance depend on a number of factors:

Length of term: Long-term policies, which deliver monthly benefits until you’re able to return to work, until you reach the retirement age you designated when taking out the policy, until your death, or until the expiry of the policy, cost more than short-term policies, which typically guarantee pay-outs only for the first 6, 12, or 24 months of your unemployment.

Level of cover: Income protection policies are sold with three different levels of cover, with different circumstances under which they pay out.

  • Own occupation: These policies, which are the most expensive, will pay out if you’re unable to continue working in your occupation. They’re a sensible option for anyone who works in a job that requires a degree of physical fitness and for which you received a great deal of education and training, such as surgery, nursing, or surveying.
  • Suited occupation: Under these policies, you’ll receive compensation if you’re unable to do your own occupation or one that suits your experience and qualifications.
  • Any occupation: The cheapest type of income protection, these policies only pay out if you’re unable to work in any job. This means your claim may be denied and you made need to retrain or take an unskilled or low-paid job.

Level of payments: Income protection insurance policies typically deliver monthly payments equivalent to 50% to 70% of your previous salary. The higher the earnings you’re covering and the higher the percentage you choose, the more you’ll pay in premiums. Additionally, insurers often put an upper cap on annual payments, often £50,000.

Type of premiums: Policies with guaranteed premiums will cost the same over the lifetime of the policy, while those with reviewable premiums will be reassessed, every two to five years, with premiums typically going up. Reviewable policies may be cheaper initially but will likely increase in cost.

Class of employment: People in some occupations are more likely to be injured on the job and more likely to put permanently out of work (at least in their field) by an injury, and consequently will pay higher premiums. Those in dangerous occupations and those which require physical fitness and lots of travel, such as firefighters, pilots, police officers, builders, and travelling salesmen, will pay more for income protection insurance than employees with desk jobs, low peril, and low travel mileage. The insurance industry categories occupations by class—typically 1 to 4—and you’ll be grouped into one when you apply for income protection insurance.

Your age: As with other insurance policies, you’ll pay higher premiums the older you are when you take out the policy.

Your health: As part of the underwriting policy, you’ll need to disclose information about your health. Smoking, drinking excessively, being overweight, and having pre-existing conditions will increase the premiums you’re quoted.

Who needs income protection insurance?

Income insurance policies are a sensible option for anyone using their salary to support dependents or make repayments on debts, especially where default can lead to the loss of a home and its equity or compounding interest and penalties. Statutory sick pay from employers is limited in both timescale and level and state benefits are unlikely to meet all of your household expenses. And those who have invested significant amounts of time and money in their education to enter prestigious well-compensated fields may especially want to protect their salary, with an own occupation policy that ensures they won’t have to retrain or settle for an unskilled job elsewhere.

However, some employers are more generous with benefits and offer robust sick pay packages —sometimes for up to a year or more (longer than the statutory 28 weeks). Some will also have group insurance policies in place. It’s important you find out what protection you already have through your employers, not only so you’re not paying for duplicate coverage but also because long-term insurance protection policies will not pay out, or will only pay out at a reduced level, while you’re receiving sick pay or state benefits.

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