Guide: Income protection.

Can’t work? Don’t worry. Income protection gives you a regular income if you get signed off work with illness or injury. In this guide, we look at some of the reasons you might consider this type of insurance…

What does income protection cover?

Income Protection provides you with the reassurance that you’ll be able to pay your bills even when you’re not working. Whether you’re injured or suffering from an illness, having income protection will help you through the hard times. 

This type of policy can be very helpful if your job won’t cover you for a long period off work and you depend heavily on your salary to support yourself and maybe your family too. Insurance protection will take some of the stress away, so you can concentrate on getting better.

What are the benefits of income protection?

Unlike critical illness cover, income protection doesn’t have a set list of illnesses that are protected by the policy. It offers fully comprehensive insurance when you need it. You just need to be signed off work by a doctor. There’s no one size fits all with income protection, it’s tailored to suit your needs.

What level of income protection do I need?

This could be linked to how much you’re spending each month or what you’d need to cover essential monthly outgoings. Alternatively, you might like to insure as much as possible. 

The maximum level of insurance you can take varies between insurers but is generally between 50% and 70% of your regular income. You don’t need to pay income tax on your payments.

During periods of ill health, it’s possible that your outgoings may increase, so it’s important to set a sensible level of cover. Reasons you may end up spending more each month include:

  • Investment in your recovery, for example gym membership or private therapies 
  • Increased household bills because you’re spending more time at home during your recovery 
  • Convenient food options, such as food kits or food delivery services, which can be expensive
  • Transport to get around if you can no longer walk or drive yourself
  • Childcare services if you need extra help looking after little ones.

How much does income protection cost? 

It depends. There isn’t a set figure that you pay for income protection as there are many factors that influence the cost, including the length of the policy, monthly income, your age, and your current health and medical history. 

We’d be happy to go through all of this with you to obtain a no obligation quote and give you a good understanding of what the premium might be.  

When will my income protection policy start to pay out?

Income protection policies pay out only once a pre-agreed period has passed. This is generally between 1 and 12 months after you are signed off work by a doctor. This is known as a deferred period. The longer the deferred period you choose, the lower your premiums.

How does the insurer assess my ability to work?

This is not a simple one! There are 3 methods insurers use to assess whether you can work:

1. Activities of daily living 

Historically, insurers would assess your ability to carry out ‘activities of daily living’. This included basic tasks like showering, getting dressed, using the toilet, brushing your teeth, walking, climbing stairs and getting in and out of a car. If you were unable to do three of these things, for example, your income protection policy would pay out. These types of policies tend to be cheapest.

2. ‘Suited occupation’ income protection 

If an income protection policy is bought on a ‘suited’ basis, this means that your insurer accepts you can’t do your job anymore but may not pay out when you make a claim if it believes you can do something similar to which you are suited. 

For example, you may have a senior role managing a team of people, which you can no longer do because of stress. With a suited policy, the insurer might deem that you go down a level, where you’re doing a similar role but no longer managing a team, and therefore refuse to pay out.  

A suited policy is preferable to one than one that uses activities of daily living to assess your ability to work, but the type that offers the most protection is an ‘own occupation’ policy (see below). 

3. ‘Own occupation’ income protection 

‘Own occupation’ income protection policies do what they say on the tin – they pay out if you can’t do the job you currently hold at the point of making a claim.  

An insurer will not make an assessment that you could take a different, similar job, and therefore refuse to pay, like a ‘suited occupation’ policy.  

This type of income protection provides the highest level of protection should you get ill and be unable to do your job.

What types of premiums are available?

There are two types of income protection premium available:

Guaranteed premiums

This is fixed for the full term of your cover, other than for an increase in cover amount.

Reviewable premiums

This is when the starting premium is reviewed by the insurance company periodically, typically every 5 years, which means that the premiums can increase significantly throughout the policy term. They are normally cheaper than guaranteed premiums when the policy starts but can end up costing more over the full policy length. 

Age costed 

You can also have age-costed policies which can have a guaranteed premium or a reviewable premium. Each year the premium will increase as you get older. With a guaranteed premium age costed policy the yearly increases will be known at the start of the policy. You pay the relevant cost based on the risk at that time, meaning the policy will offer very affordable cover while you’re young but will increase significantly as you get older, particularly when you’re over 50.

What are the different types of income protection? 

There are 2 types of income protection, full cover and short term pay-out, also known as budget cover.

Full cover 

Full income protection will pay out from the end of the deferred period until you are well enough to return to work or if that doesn’t happen all the way through until the end of the policy term, which could be more than 40 years. This option offers the maximum amount of protection in the event of a claim

Budget income protection (short-term pay-out) 

Budget income protection will pay out from the end of the deferred period until you are well enough to return to work or if that doesn’t happen for a set period, which is normally anywhere between 1 and 5 years.  These policies are usually significantly cheaper than a full income protection policy and are provide valuable protection where your budget doesn’t stretch to a full term policy.

Can I protect my policy against inflation?

When working, most people get a gradual increase in salary to ensure that their pay keeps up with the rising cost of living. But if you come to claim on an income protection policy that only pays out a proportion of your salary today and doesn’t account for future rises, the amount you receive will be worth less and less over the years. 

To protect against this, you have the option to add an ‘index-link’ to your income protection policy, meaning it rises with a measure of inflation, such as the consumer price index (CPI) or the retail price index (RPI), each year. 

This will increase your premiums each year and they’re usually increased by a little more than inflation.

I’m self-employed. Can I get income protection? 

Yes, you can. To support a claim, you’ll need to provide evidence of your income, such as your most recent SA302 tax calculation.

Can I get income protection if I have a pre-existing medical condition?

Possibly, but your choices might be limited. It’s likely that if cover is available, you’ll need to pay more for your premiums, or the provider may say they won’t pay out if you’re off work because of the condition you have.

It’s important to tell your insurance provider about any medical problems that could affect your claim. If you don’t, they could refuse a pay-out.

What extras can I add to my policy?

Fracture cover  

Fracture cover is offered by a few insurance companies and can be bolted onto a critical illness policy at a cost. With this cover, you could receive a lump sum of up to £6,000 (depending on where the fracture is) to help tide you over while you recover.    

Second medical opinion  

This provides access to a database of consultant specialists throughout the UK, allowing a face-to-face consultation with a supporting report which is sent to both you and your GP. This is useful if you have a critical illness and want a second opinion from an expert.  

Support helplines  

Some providers also offer helplines for mental health, medical queries, legal advice etc. For example, you could have a nurse on hand to discuss medical concerns, or access to mental health support. 

Hospitalisation benefit 

Some policies pay you a proportion of your income protection if you go into hospital, even if this is before your deferral period is over. 

Waiver of premium 

This means you won’t have to pay premiums while you are claiming on your income protection policy. 

Payments when you go back to work 

Many income protection policies don’t stop paying when you go back to work if your earnings are reduced because of your illness (perhaps because you are working fewer days). Providers will continue paying your income, albeit at a reduced amount, taking into account  your reduced earnings. This will end once your earnings recover to the level when you took the policy out.

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