Disability insurance

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What is disability insurance?

Disability insurance is a term that usually describes income protection insurance. These are policies which pay out a portion—usually between 50 and 70%—of your previous income if you’re unable to work due to accident or illness, causing you to become disabled.

These policies were previously known as permanent health insurance.

How does disability insurance work?

Disability insurance generally refers to long-term income protection insurance, with payments which typically last until you’re able to return to work, you reach a pre-determined retirement age, you die, or the policy expires—whichever comes first. Typically, disability insurance delivers monthly payouts equivalent to 50 to 70% of your previous salary if you’re unable to work due to accident or illness.

Most policies will come with a deferment period, usually a period of 26 or 52 weeks when you’re eligible but unable to claim. This means you won’t be able to claim until you’ve been out of work for a certain period of time, but luckily, this will likely correspond to the time frame of the statutory sick pay offered by your employer. In fact, you generally won’t be able to claim on your disability insurance policy if you’re still receiving statutory sick pay. 

But there are also short-term income protection policies, which can deliver monthly payments for a set period of time—usually 12 months but sometimes up to two years—if you’re out of work due to illness, injury, and sometimes involuntary redundancy. Sometimes these policies can be pegged to a specific debt: for instance, your mortgage (mortgage protection insurance) or repayments on another form of debt (payment protection insurance).

Levels of cover

Disability insurance has three tiers of cover, with different conditions under which they regard you as disabled and pay out:

• Own occupation: The most expensive policies, which are activated if you’re unable to continue working in your current occupation, the one you’ve trained for and have experience in. They’re a good option for anyone who has received a great deal of education and training to reach their jobs and whose jobs require some physical fitness or finesse, for example, surgeons, nurses, or surveyors.
• Suited occupation: Policies that deliver compensation if you’re unable to work in your occupation or another which matches your experience and qualifications. 
• Any occupation: The cheapest form of disability insurance; policies which only pay out if you’re unable to work at all, in any job. This may mean you can’t claim if an illness or injury disqualifies you from your current job or a similar one but you’re able to take a more menial, less skilled, and likely lower paid job elsewhere.

How much does disability insurance cost?

The amount you’ll pay for disability insurance depends on the following factors:

• Your age: As we age, the likelihood of us developing illnesses that put us out of work increases. Therefore, the older you are when you apply for disability insurance, the higher the premiums you’ll be quoted. All the reason to get ahead of the game and arrange a policy sooner rather than later. 
• Your health: Furthermore, if you’re younger, you’re unlikely to have pre-existing health conditions, which you’ll have to disclose to your insurer as part of the underwriting process for your policy. Having health problems which may pre-dispose you to an illness that takes you of the work force, can drive up the premiums on your disability insurance.
• Length of term: Long-term policies, which can deliver payouts potentially for decades, are more expensive than short-term policies, which usually come with terms limited to a couple of years.
• Level of cover: Own occupation policies are the most expensive and cover any occupation. The cheapest only pay out if your illness or injury is so serious that you’re unable to work in any capacity.
• Class of employment: On the job injuries are more common in some fields than others, and the premiums of your policy will reflect that risk. Firefighters, builders, pilots, and travelling salespeople will pay the most for disability insurance, while those with desk jobs and little travel mileage will pay the least.
• Amount of payments: The level of your income and the percentage you’re insuring will also influence your premiums. Most policies will have a maximum income they’ll cover, however, and an annual cap on payments, usually £50,000.

Other insurance to consider

Disability comes with complex needs and financial obligations which can’t always be met simply by income protection insurance. Here are some other insurance products to consider, to guarantee you receive the best care and live the most comfortably in the event of a serious accident or illness.

• Private medical insurance: Health insurance which covers the cost of private medical care and can guarantee you access to the most advanced, flexible treatment, with a doctor and at a facility of your choosing, without the waiting lists of the NHS. It can’t generally be used for the treatment of pre-existing health conditions or the management of chronic conditions, but it could be invaluable for safeguarding your health, both before and after a potentially disabling event.
• Critical illness cover: Policies which pay out a tax-free lump sum if you’re diagnosed with a serious illness or involved in a serious accident during the term. These policies differ from disability or income protection insurance in that they offer one large payment rather than an ongoing income, but this can be especially useful for some families. The sum can be used to pay off a mortgage or can be invested to provide an ongoing income while you’re out of work. You can often add critical illness cover to your life insurance policy, for an additional charge on your premiums.