In this detailed guide, we look at sick pay insurance and answer a number of questions including:
- What types of sick pay are available?
- What different types of sick pay insurance are available and how do they work?
- How do I work out which type of sick pay insurance is best?
- How much sick pay insurance do I need?
- How can I bring down the cost of sick pay insurance?
- Where is the best place to buy sick pay insurance
We also explain how to get up to £100 cashback when you buy a sick pay insurance policy, read on to find out more.
What is sick pay insurance?
Sick pay insurance can provide you with an ongoing income if you are unable to work due to an accident, injury or sickness. The most popular type of sick pay insurance is Income Protection, a policy that will continue to pay sick pay benefits right up until retirement (if required). The premium you pay is based on the type of job you do, how much cover you need and when you want it to start paying out (known as the 'deferred period'). We explain more about how much income protection costs later in this article.
What are the types of sick pay available?
There is often confusion over what types of sick pay you may be entitled to and which type of sick pay insurance is best and so we have provided a simple guide to the different types of sick pay benefits and sick pay insurance below:
Employer sick pay - Your employer may offer you sick pay as part of your employee benefits package. It will vary depending on the employer, with some offering very generous packages of up to 6 months full pay, whereas others may offer none at all. It is always worth checking what you are entitled to.
Statutory sick pay (SSP) - This state benefit is paid by your employer and it pays £99.35 per week (2022/23) for up to 28 weeks. You need to be ill for at least 4 days before you can claim and you must earn at least £123 per week on average in order to qualify. You are allowed to receive this benefit on top of other private insurance benefits (such as Income Protection).
Employment support allowance (ESA) - If you are unemployed, self-employed or have exhausted your statutory sick pay entitlement then you may be entitled to claim Employment Support Allowance (ESA). When you first make a claim you will be placed in the assessment category, a period that could last up to 13 weeks. Employment support allowance can pay between £61.05 and £117.60.
Income Protection - A comprehensive insurance policy that pays out an income if you are unable to work through any accident, illness or injury. Benefits can be paid up until retirement. Premiums can be tailored to individual needs and will be based on the type of job you do, how healthy you are, how much cover you need and when exactly it starts paying out (deferred period).
Short term Income protection - This works the same as income protection insurance, but the benefit is restricted to paying out for just one, two or five years. As the policy would pay out significantly less than full income protection, the premiums are less. This is a sensible option for those that cannot afford full income protection.
Accident & Sickness cover - A short term policy that will replace a portion of your income if you have an accident or are sick and cannot work. Most people choose a level of cover that is enough to cover either their mortgage, bills or both. Most policies will only cover up to around 50% of your gross income, compared to around 65-70% with most income protection policies. This type of income replacement policy will typically pay out for a year and so is less comprehensive than income protection or short term income protection.
Accident, Sickness and Unemployment cover (ASU) - The same as accident & sickness cover but with the added element of unemployment cover. Unemployment cover will usually pay out for a maximum of one year. It is worth noting that during the Coronavirus outbreak, insurance companies stopped offering unemployment cover as part of their Accident, Sickness and Unemployment cover. Unemployment cover can be expensive and so you should think carefully as to whether it is something that you truly need. It often makes more financial sense to invest the cost of the unemployment cover into a more comprehensive sick pay insurance, so that you are covered for longer in the event of a long term illness.
Redundancy cover - Not strictly a type of sick pay insurance but redundancy insurance will pay out up to 50% of your gross income (for up to one year) in the event that you are made redundant. It can be added to some types of short term income protection insurance policy and most people choose enough to ensure their mortgage payment or other bills are covered.
Mortgage payment protection - A type of Accident & Sickness insurance policy that is designed to pay out a set amount that can be used to cover your mortgage repayments if you have an accident or are too ill to work. Policies pay out for a maximum of one year. Policies usually start paying out after either 30 or 60 days of you being unable to work. Some policies will backdate the benefit so that you are paid from the first day of your being unable to work. Payments are usually capped at either £1,500 or £2,000 per month, or at a set percentage of your gross income.
How does sick pay insurance work?
For the purposes of the rest of this article, I will be focusing on income protection insurance as it is the most popular and comprehensive type of sick pay cover and is the best option for most people. Below we explain how sick pay insurance works in 5 easy steps:
Step 1 - Set a budget
When deciding on how much sick pay insurance to get you should first decide on how much you are willing to pay and so it is important to set a realistic budget. Try and find a good balance, don't set a budget that is too low because it is unlikely that any policy will truly suit your needs and similarly don't assume that you will need to pay for a policy that costs hundreds of pounds a month. The trick is to find a sick pay policy that is both comprehensive and good value and we explain how to do that as you read through this article.
Step 2 - Decide how long you could survive without any pay
When choosing the right sick pay insurance you will need to set a deferred period, this is essentially the period you need to be ill for before the policy starts paying out. Make sure you check to see if you are entitled to any sick pay from your employer. If you are entitled to sick pay, make sure you choose a deferred period that matches, so that the sick pay policy starts paying out when work stops paying you.
Also, it is worth considering whether you have any savings or emergency funds that you could use. Sick pay insurance is cheaper the longer you wait before it starts paying out. If your employer pays you sick pay for say up to a month and you have enough savings to cover another month's salary, then you should select a deferred period of 8 weeks.
Deferred period options on an income protection policy
- Day 1 - Most expensive
- 4 weeks
- 8 weeks
- 13 weeks - Most popular
- 26 weeks
- 52 weeks
- 104 weeks - Cheapest
Sick pay insurance that starts paying after just 1 day will be significantly more expensive than sick pay insurance that starts paying after say 3 or 6 months (as you are far more likely to claim). The most popular choice for most is 8 or 12 weeks deferred.
Step 3 - Decide how much sick pay insurance you actually need
It is tempting to assume that you'll need the maximum amount of cover but this is not necessarily the case and is a mistake a lot of people make. This is why sick pay insurance is often mistakenly labelled as expensive and why many will pay more for their sick pay insurance than they need to. You should look at your finances and understand exactly where your money goes and how much of your spending is on essentials. You are likely to spend far less when you are ill and so you should adjust the amount of insurance you need based on what you are actually going to need. If you think about it, if you are suffering a long term illness, it is unlikely that you'll be able to visit your favourite restaurant, go to the theatre or even go on holiday and so all of this should be taken into consideration.
Also, check to see how much of your current income is being put towards savings and investments. While it would be nice to continue to save if you are unable to work, consider whether it is worth insuring that extra discretionary income. Insuring less will bring down your premiums.
Step 4 - Decide whether you want short-term or full sick pay insurance
There are two types of income protection insurance, short term income protection that will pay out for a maximum of one, two or five years and full income protection which can pay out until retirement. Full income protection is roughly two to three times more expensive than short term income protection but remember, it has the potential to pay out significantly more if you stop working and are unable to return to work for a long period of time.
Below we provide an example of the total premiums and total potential payout for a short term income protection plan vs a full income protection plan. The figures below assume you make a claim and are never well enough to return to work. The figures are based on a healthy 30-year-old office worker who needs £1,500 per month cover on an 8-week deferred period (claim is accepted after month 3)
Cost comparison and the potential payout of short term income protection vs full income protection
|Short term income protection (pays out for one year)||Short term income protection (pays out for two years)||Full income protection (pays out until retirement - 35 years)|
|Potential payout||£18,000 *||£36,000 *||£625,500*|
^ premiums based on a clerical worker aged 30 who is a non-smoker with no adverse health or lifestyle risks
*assuming your illness or injury means you are never able to return to work
It is worth noting that you can claim multiple times under both short term and full income protection insurance. We explain exactly how this works later in this article
Step 5 - Decide on your cover options
Once you have decided on your budget, how much cover you need, your deferred period and the type of income protection you want, you then need to decide which cover options to take.
Guaranteed or reviewable premiums - Firstly, you'll need to choose whether you want guaranteed or reviewable premiums. Guaranteed premiums start out more expensive, but you'll know exactly how much you'll be paying each month going forward.
Alternatively, reviewable premiums start out cheaper but will be reviewed by the insurer, either every year, two years or five years (depending on the insurer). Premiums are reviewed based on your age and total claims, not on your health and so you won't pay more if your health has deteriorated. Premiums can rise quite steeply and so if you can afford the guaranteed premium from outset then it is the preferred choice for most.
Indexation - You'll also need to decide on whether you want to add 'indexation' to your income protection policy. By adding indexation, both your premiums and the amount you are insured for will rise in line with inflation (using the Retail Prices Index or RPI). This helps to future-proof your policy and will ensure that your benefits rise as the cost of living increases. Most people opt to add this to their income protection policy.
Waiver of premium - You will have an option to take out waiver of premium. This is essentially an insurance policy within an insurance policy and if you opt to add it to your policy, you will not need to pay your premiums while you are in receipt of a claim. Waiver of premium is relatively inexpensive and ensures that you do not need to pay for your sick pay insurance while claiming, meaning you could reduce the total amount of cover needed. Taking this option is really down to personal choice and I would recommend that you get a quote with and without it and see if it represents good value.
What does sick pay insurance cover?
Sick pay insurance will pay out if you are unable to work due to an accident, injury or illness. Importantly, sick pay insurance can pay out multiple times, even for a recurring condition, you would just need to complete the waiting period each time you make a new claim. You can claim multiple times on both short-term and full income protection, however payouts on short-term income protection will be limited to either one, two or five years, unlike full income protection which would continue paying until you either retired, returned to work or sadly died.
What doesn’t sick pay insurance cover?
Sick pay insurance is designed to pay a guaranteed income in the event that you are unable to work due to an illness, accident or injury. Sick pay insurance concentrates on whether you are able to work, unlike other policies such as critical illness insurance that focus on a particular illness or disability. You could theoretically have a life-changing disability that doesn't affect your ability to work and so sick pay insurance will not pay out.
Additionally, sick pay insurance will not pay out if the illness or injury was caused by cosmetic surgery, war or by engaging in a dangerous activity without appropriate training and/or suitable protective equipment.
How much income can I receive from sick pay insurance?
Insurance companies will allow you to insure up to a maximum of 70% of your gross income. When you consider that benefits are paid tax-free, this will be ample for most people, especially when you consider that Statutory Sick Pay (SSP) benefits can be paid on top.
Remember that if you are too ill to work you will likely be too ill to go out and so your spending will naturally fall and so it is likely you'll need less money to survive on. Depending on the severity of your injury or illness, you may also qualify for additional benefits and so you should factor this in when working out how much you need.
Below we have provided a typical example of how sick pay insurance could work. The example is based on someone earning around £35,000 per year and demonstrates how they could easily survive by insuring just 50% of their gross income.
The two tables below compare how income and expenditure would typically look prior to a sick pay claim and also when in receipt of a sick pay claim.
|Monthly Net Income||£2,250||Sick Pay Insurance||£1,455|
|Statutory Sick Pay*||£0||Statutory Sick Pay*||£431|
|Total Income||£2,250||Total Income||£1,873|
|Bills (inc insurance)||£550||Bills (inc insurance)||£550|
|Petrol / Travel||£100||Petrol / Travel||£0|
|Eating Out||£100||Eating Out||£0|
|Cinema / Theatre||£75||Cinema / Theatre||£0|
|Total Expenditure||£2,250||Total Expenditure||£1,850|
*Statutory Sick Pay (SSP) pays £99.35 per week for up to 28 weeks. SSP is paid via your employer and works out at £430.52 per month on average. To understand how this is worked out, you multiply the weekly amount of £99.35 by the total number of weeks in a year, and then divide that by the number of months in a year to get the monthly amount. It works out as follows: £99.35 x 52 / 12 = £430.52.
You may wish to insure more of your income to ensure that you have enough income should you suffer a long term illness.
As you can see, discretionary spending is likely to significantly reduce, as well as spending on travel and petrol and you may find that you can no longer afford to put money into savings.
How much does sick pay insurance cost?
There are several factors that can impact the cost of sick pay insurance and these are as follows:
- Your age
- Your health
- Amount of cover
- Insurance company
- The deferred period (the amount of time you have to wait before you can claim)
- Guaranteed or reviewable premiums
- Waiver of premium (taking this means you don't have to pay your premiums when you are claiming)
As you can see, there are a lot of factors that can affect the price that you pay for sick pay insurance. Due to the complexity of the cover and the number of insurers that offer sick pay insurance, often the best way to understand the cost is to speak to an independent sick pay insurance specialist such as LifeSearch*. They can explain all of the options that we have detailed in this article and search every insurance company on your behalf to come back with the most comprehensive quotes at the most competitive price.
Below we have provided some example quotes to give you an idea of cost. These various quotes are based on a healthy 30-year-old non-smoker wanting £1,500 sick pay insurance per month, payable after a 3 month waiting period.
Monthly cost comparison income protection based on occupation
|Short term income protection||Full income protection (Reviewable premiums)||Full income protection (Guaranteed premiums)|
The above quotes are the cheapest quotes based on a range of quotes from multiple insurers.
Do I need sick pay insurance?
Ask yourself the question 'How long could I survive financially without an income'. If the answer to that question is 'I could survive until retirement', then you do not need sick pay insurance. If the answer is anything else then you would benefit from having some form of sick pay cover.
Remember, you may already be entitled to some sick pay from work, you may also have some savings and of course, you don't have to insure all of your income. There are many ways that you can bring down the cost of the cover so that you have an element of cover in place should you be unable to work for a long period of time. We explain in the next section how to get the best value sick pay insurance and also how you can get up to £100 cashback when you take out a policy.
If you are self-employed then sick pay insurance should be a priority as you do not have the luxury of an employer paying you while you are sick. Check out our article 'Should I get self-employed income protection and which one is best'.
The best sick pay insurance providers
Below we have listed the top 10 sick pay insurance providers and the types of sick pay insurance policy they offer:
|1 year short term policy||2 year short term policy||5 year short term policy||Full income protection|
In order to understand which is the best sick pay provider for you, speak to an independent income protection specialist such as LifeSearch*. They will be able to search every sick pay provider on the market as well as provide you with guidance and advice to ensure that you are buying the best policy for your individual needs. Additionally, if you buy a policy through them via the link above, you will qualify for up to £100 cashback.
For more information on the top sick pay insurance providers, check out our article 'Compare the best 10 income protection policies in the UK'
How to claim on a sick pay policy
Firstly, contact your insurance company. They will either ask you to complete a claim form or take the details over the phone. They will likely ask for additional information such as your GP details and your employer's address. You'll need to continue paying your premiums while your claim is being assessed. The insurance company will keep you updated while they look into your claim and it should take no longer than 30 days, however it will depend on the insurance company getting the acceptable evidence back from your employer and GP.
Things to bear in mind when making a sick pay insurance claim:
Premiums - Sick pay insurance will not pay out if your premiums are not paid up to date.
Deferred period - In order to claim, you'll need to have completed the necessary waiting period (deferred period).
Exclusions - When you first take out a policy it will be medically underwritten by the insurance company. If you have had medical complications in the past, an insurer may decide to increase your premiums or even restrict claims arising from certain parts of your body. These are called exclusions and you should be clearly notified in the policy documentation when you receive a decision from the insurer. It is important to note that you do not have to accept this decision, you are free to apply elsewhere in an effort to get better terms. This is why it is especially important to get advice when buying sick pay insurance as an independent specialist can do this research on your behalf.
Any, own or suited occupation definition - When you take out a sick pay policy you will be provided with an occupation definition. Most policies are sold based on an 'own' occupation definition and this means that the policy will pay out if you are unable to carry out the tasks and duties of your own occupation. An own occupation definition provides the most comprehensive sick pay cover as it means that so long as you cannot do your own job, the policy will pay out.
Some riskier occupations may be given an 'any' or 'suited' occupation definition meaning the policy will only pay out if you are unable to carry out any or any suited occupation, meaning you'd likely have to be very unwell in order to claim. This type of definition is far less comprehensive. You can read the more detailed information in our article, "Sick pay insurance: Occupation incapacity definitions explained"
Alternatives to sick pay insurance
There are lots of different types of sick pay insurance available including Accident Sickness and Unemployment (ASU) cover, Mortgage Payment Protection Insurance (MPPI) and Loan Protection but all of these policies only help in the short term and so won't cover you if you are unable to work for a long period. It is often better to take a more comprehensive type of sick pay insurance, but then if the cost is prohibitive, insure for a lower amount, as it has the potential to pay out more over the long term.
You could also consider a different type of insurance called Critical Illness insurance. This type of insurance does not pay a regular income and instead pays a lump sum if you are diagnosed with one of a list of defined 'critical' illnesses, as set out by the insurer. Check out our article 'Critical illness insurance, what is it and is it worth having?'.
Another alternative is not taking out any sick pay insurance at all and saving the money you would pay on insurance into a savings account instead. It is worth bearing in mind that it is extremely unlikely that you will ever save enough to cover a long period of illness, with an average 30-year-old likely to need in the region of £500,000 to last until retirement.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article - LifeSearch