Income Protection Insurance – Do I Need It?

Written by Sam Hodgson
Last updated: 5th August 2024

Designed to provide you with enough money to keep going if you become unable to work due to illness, income protection insurance is one of a set of health-related insurance policies that can provide support in the worst of times.

But how does income protection insurance work and do you need it?

What Is Income Protection Insurance?

Income protection insurance is there to ensure money is still coming in each month if you find yourself unable to work for a prolonged period due to a disability or illness. In many ways it provides similar protection to critical illness cover (CIC), however, where CIC pays out a lump sum upon you becoming incapacitated, income protection insurance is a monthly payment that replaces a portion of your lost salary.

What Does Income Protection Insurance Pay Out?

Most income protection policies pay out between 50% and 70% of your current monthly income. While this may not enable you to live the full lifestyle you’ve been enjoying, it will make sure that the bills are paid and take away the worry that a total loss of income will bring.

How Much Does Income Protection Insurance Cost?

As with all health-based insurance policies, the cost of income protection insurance will vary greatly depending on your circumstances. Nonetheless, it’s likely to cost less that you think it will.

Taking out an income protection insurance policy at an early age ensures that you will have access to the cheapest premiums that will stay with you until you make a change to the policy.

It’s worth getting income protection insurance as soon as you can. Income protection insurance premiums can start at as little as £10 per month, however most tend to cost between £30 and £60 per month, with an average cover between £1,500 and £2,000 per month. Factors such as age, income, health, occupation, and more all affect your income protection insurance premium.

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What Conditions Does Income Protection Insurance Cover?

The range of conditions that are covered under your income protection insurance policy will depend on your insurance provider and the cover they offer – not all insurers are the same.

However, the majority of insurers will cover most illnesses that mean you are signed off from work by a doctor. These can be both physical illnesses as well as a range of medical conditions, such as depression or anxiety. The following are all examples of conditions covered by the majority of income protection insurance providers:

Cancer
Multiple Sclerosis
Loss of Limbs
Kidney Failure
Stroke
Heart Attack
Dementia
Muscular Dystrophy
HIV/AIDS
Blindness
Depression
And many more…

Income protection insurance doesn’t cover loss of income due to non-medical reasons (quitting a job, redundancy, etc.), pre-existing medical conditions, or self-inflicted injury.

Understanding Deferment and ‘Own Occupation’

There are a few conditions to income protection insurance to understand. Deferment Period The first is the deferment period – this is the number of months (or sometimes, weeks) before the insurance applies. The longer the deferment period, the cheaper your insurance policy will be. There are a few reasons why you might choose an extended deferment:

You know you will get sick pay from your job for a number of months once sick.
You have savings and can survive for a while without claiming on the insurance policy.
You are seeking to lower the insurance premium and are happy to ‘take the hit’.

It is important to properly consider the balance for your deferment period to get the right policy for you. Own Occupation Your job can have a significant effect on the cost of your income protection insurance policy.

If you work in a dangerous industry, for example, you are more likely to become injured and thus the risk (and cost of policy) is higher. More than that, though, is the concept of ‘own occupation’. This means the policy will pay out if you are unable to do the work you currently do, even if you could do another job – this is what most people assume when they look to income protection insurance.

Alternatively, you may look to an ‘any occupation’ policy. This will lower your premium, but means that the policy will only pay out if you are ill or injured to the extent that there is no job you could do – even one for which you have no training.

Consider a professional plumber who sadly loses a leg in an accident. Under ‘own occupation’ insurance, he would be signed off (potentially for many years), and able to claim the income protection insurance.

With ‘any occupation’ insurance, he would be assessed and potentially determined to be able to take an office job where he spends his time sat at a desk. In this case, the income protection insurance would not pay out for longer than it took his immediate injury to heal.

Can You Get Income Protection Insurance When Self Employed?

Many self-employed people, especially sole traders, are concerned that they cannot get adequate income protection insurance that accurately represents their income. Thankfully, the majority of providers have comprehensive plans for self-employed people that are tailored to provide the best protection.

For those with regular and consistent income, income protection insurance is calculated based on the latest tax return, offering a similar 60-70% of an average monthly income that salaried employees receive. If, however, your income is somewhat inconsistent or is likely to increase significantly and you want a higher level of protection, you can request a guarantee based on a recent specific monthly income.

As an example, Bob is a self-employed contractor. In the previous tax year, his earnings as represented by his self assessment tax return were £24,000, equivalent to a monthly average of £2,000; however, he’s built up his work since and the last two months he has earned £5,000 and £5,500 respectively. Using these recent figures, Bob is able to set a guaranteed payout on his income protection insurance of £3,000 per month (60% of £5,000), rather than settling for a maximum of £1,200 (60% of £2,000).

No matter how Bob’s income fluctuates in the future, either increasing or decreasing, should he claim on his income protection insurance it will pay at £3,000 per month.

Of course, guaranteeing this larger sum does mean Bob’s premiums are higher, but they also more properly represent the income he is receiving and give him the reassurance he needs that his insurance will cover his outgoings.

Income Protection Insurance vs. Universal Credit and Other Benefits

One question that often comes up when considering income protection insurance is ‘how does income protection insurance affect benefits’. The answer is that it does depend a lot on your circumstances, but yes, income protection insurance will count as income and affect universal credit and other benefits.

However, that doesn’t mean it’s not worth having. Most means tested benefits in the UK are designed to ‘top up’ any existing income and are not simple deducted on a 1:1 basis from other income. This means that while having income protection insurance will deduct from your total benefits, it will still leave you considerably better off than relying on benefits alone.

Bear in mind also, that if you have a repayment mortgage, neither universal credit nor housing benefit will help to pay that – income protection insurance is the ideal way to keep up with your mortgage payments should you be unable to work.

Unfortunately, the complexity and unique individual nature regarding the multiple factors that go into benefit calculations mean it is impossible to provide set figures regarding the affect of income protection insurance on benefits.

The Pros and Cons of Income Protection Insurance

Pros

Provides peace of mind for the future
Offers many years of cover should you become unable to work
Ensures your bills and outgoings are met
Often covers additional medical costs (depending on policy terms)
Is available for everyone currently working, including the self-employed
Premiums are often cheaper than expected

Cons

Typically won’t cover pre-existing medical conditions
Deferment rules mean most policies take time to ‘kick in’
Some injuries and illnesses are excluded – it’s important to check the specific terms of your policy
Premiums do increase with age, so choosing income protection insurance later in life can be more expensive

Do I Need Income Protection Insurance?

The key question! And the answer is… Yes. Insurance is there to prepare for eventualities you don’t expect and which hopefully will never happen.

Because of this, there’s a feeling with insurance policies that they’re a waste of money and you’re just giving money away that you’ll never get back.

Honestly; if that’s the case with income protection insurance, then it’s great – because you’ve gone through your whole working life without ever getting seriously ill or having a debilitating injury. That’s something we all want.

But what if…? Income protection insurance is about peace of mind. It’s about knowing you can continue to provide for yourself and your family if something terrible and unexpected happens – and sadly, the days following a serious illness diagnosis or accident can be among the worst in your life.

Having to worry about where future income is coming from on top of the life-changing scenario you are also deal with can be a pressure too far for many. Income protection insurance gives you peace of mind every month and the financial support you need if anything did happen.

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