Why Have Income Protection Insurance?

A serious accident or injury could be detrimental to your livelihood and even leave you out of pocket. During this time, you could find yourself struggling to cover expenses and your family's and/or loved one’s needs.

Income protection insurance is one type of policy designed to provide financial support in such events. So why have it?

What is the purpose of income protection?

Income protection insurance is designed to give you peace of mind and financial stability if you’re unable to work due to illness or injury. Rather than leaving you to rely on savings, support from loved ones, or limited sick pay, it provides a regular income to help maintain your standard of living.

The policy can help cover costs such as:

• Household bills and utilities

• Mortgage or rent payments

• Day-to-day living expenses

• Credit card debt

• Other ongoing financial commitments

It replaces a portion of your income so you can focus on your recovery without the added stress. This could be essential if you have dependents, shared financial responsibilities, or limited employer sick pay.

How does income protection work?

Income protection can pay out a monthly tax-free sum to replace lost income, should you be unable to work due to illness or injury. The sum paid is usually around 50-75% of your monthly wage.

It's sometimes known as permanent health insurance.

The illnesses and injuries covered can range from more minor cases like back pain and stress-related conditions, to more serious and long-term illnesses such as cancer or severe injuries from an accident. Not all conditions will be covered, including certain pre-existing conditions.

When a claim is successful, you'll continue to receive monthly payments until you either return to work, retire, die, or the policy ends.

You can't make a claim straight away, however. Policies usually come with a deferred period (also known as a waiting period) in place that specifies how long until a claim can be made. 

Depending on the provider, your preference and any sick pay you’re entitled to through work,  this can be from one day to two years.

Is it worth having income protection?

The benefits you receive from your employer or the government may not be enough to support you and your loved ones’ needs. In that case, having protection of your own can help ensure you're covered in any eventuality.

If you’re employed, you may receive sick pay from your employer. However, this is often limited to a set period or a reduced amount.

After that, you may need to rely on Statutory Sick Pay (SSP), which is considerably lower than most people’s regular income and is only paid for a limited time.

Definitions of incapacity

Policies may use different definitions, including:

• Own occupation – Pays out if you can’t do your specific job

• Suited occupation – Pays out if you can’t do a job suited to your skills and experience

• Any occupation – Pays out only if you can’t do any job at all

What income protection doesn’t cover

Most modern income protection policies do not cover:

• Redundancy or unemployment

• Pre-existing conditions (unless accepted)

• Claims during the deferred period

• Self-inflicted injuries

• Situations where you can still work under the policy definition

Though income protection policies do not include redundancy or unemployment cover, there are other types of protection that may offer it.

Key benefits of income protection

There are plenty of benefits that come with having an income protection policy, including:

1. Ongoing monthly payments

Unlike policies that pay out once, it provides a steady monthly income while you’re unable to work. This can be especially handy if you have financial commitments to cover, like a mortgage, which you would need help with.

2. Cover for a broad range of conditions

It doesn’t rely on a strict list of critical illnesses. Many physical and mental health conditions are often covered, provided they prevent you from doing your job. This can include a major injury to mental health conditions, such as depression or anxiety disorders.

3. Long-term support available

Your policy will pay out until retirement age if you’re unable to return to work. Likewise, if you're out of work on a long-term basis, you can rely on the payments to cover expenses in the meantime.

4. Flexible policy options

Income protection offers a lot of flexibility in terms of cover. You can usually choose:

• The level of cover (up to a percentage of your salary)

• The deferred period (the waiting time between your diagnosis and the plan paying out)

• The policy term (how long you’re covered for)

With this, you can tailor cover around your budget and financial commitments. For instance, you may want the policy term to coincide with the length of your mortgage, or until your expected retirement age.

 It can also work alongside other forms of protection like life insurance.

5. Valuable for the self-employed

Being self-employed often means you don't receive the benefits that come with standard employment, such as sick pay. Income protection can be particularly useful for groups like freelancers, contractors, and small business owners, providing a financial safety net that might otherwise be missing.