Income protection is perhaps the most vital personal insurance for anyone who depends on their ability to generate an income. In this article, we explain the main features and benefits of income protection and compare income protection policies sold by 10 of the best income protection companies in the UK market.
If you know how income protection insurance works you may want to jump ahead to "Top 10 income protection insurance policies in the UK"
What is income protection insurance?
Income protection insurance is a personal insurance policy that pays out a monthly benefit if you become unable to work due to illness or injury. Many policies will not pay out if you have been made redundant, however. Income protection policies will often pay out until your retirement, death or until you return to work, although short-term policies are also available that will pay out for a limited period of time - often around one, two or five years. Short-term policies usually have cheaper monthly premiums as a result.
Income protection insurance policies will pay out after an agreed deferred period has passed which is often between one and 12 months. The deferred period is the waiting period between the first day that you are unable to work and when the income protection benefit starts to be paid to you.
Payouts are tax-free but are only for a percentage of your salary, typically around 60% to 70% of your gross income can be covered. The benefit amount is not taxed and you can usually receive state benefits like statutory sick pay in addition to the income protection pay out.
Who needs income protection insurance?
As well as employees, self-employed workers should also think about buying income protection insurance if their income is dependent on their ability to work. Income protection cover is for anyone who will suffer a loss of income if they became ill or injured so that they can receive a benefit that will provide financial support. Manual workers are usually the most aware of this risk but it is worth noting that stress, depression and anxiety as well as other mental health conditions are high on the list of reasons for claims as is cancer. Falling ill could prevent anyone from being able to work including clerical workers.
Self-employed people should bear in mind there may be restrictions on payment levels and deferred periods. You are also likely to be asked for one year’s worth of audited accounts to prove your income - some insurers will require this upfront and others only require this if you claim. Find out more in our article ‘Should you get self employed income protection and which is the best?’
Types of income protection
There are some different types of income protection to consider before you take out a policy and we have summarised the most popular below.
Short-term income protection insurance
Short term income protection insurance pays out for a limited period - you can choose between 1, 2, 3 or 5 years of benefit payment per claim. Although there is a limit to the period of time for each claim, multiple claims are possible. In addition to paying out if you are unable to work due to illness or injury, some policies will pay out if you are made redundant. This limited option is cheaper than the more comprehensive, long-term income protection cover.
Long-term income protection insurance
Long term income protection insurance provides a monthly payment for as long as it takes for the insured person to recover and return to work and if there was no recovery then the policy can pay out until retirement or death. Long term income protection policies are usually more expensive but like the short-term policies, you can make multiple claims during the term of the policy. So, even if you recover from an illness and return to work, you may be able to claim on the same policy in the future should you fall ill again.
What are the different types of income protection premiums?
Income protection quotes are not all the same and it is vital to understand what type of premium you have been quoted before you start your income protection insurance policy.
Guaranteed income protection premiums - fixed from the start of the policy so the price won't change for the whole term even if you claim.
Reviewable income protection premiums - can be adjusted by the insurer at regular intervals even if you don't claim; cheaper to begin with but could end up costing more over time.
Age-banded income protection premiums - premiums generally start off lower but will increase every year with your age and you can usually see what the increases will be each year making them predictable.
How much does income protection cost?
The cost of income protection insurance will vary depending on a number of different factors including your age, whether you smoke, your lifestyle and health, your occupation and how much cover you require. Below, we have shown some examples to give you an idea of what you might pay for monthly premiums.
|Age||Monthly benefit||Cover to the age:||Deferred period||Monthly premium*|
*These income protection quotes are based on someone without any additional risks at work and who is a non-smoker without any medical concerns. They should only be used as a general guide.
Top 10 income protection insurance policies in the UK
The table below compares 10 of the best income protection providers in the UK.
|Provider||Maximum insured amount per year||Benefit period (length of cover)||Claims history||Deferred period (weeks)|
|Aviva||£240,000||2 years and full term||85.4% paid out (2021)||4, 8, 13, 26, 52 or 104|
|British Friendly||£45,500||1, 2, 5 years and full term||81% paid out (2021)||1, 4, 8, 13, 26 or 52|
|L&G||£240,000||1 or 2 years and full term||81% paid out (2021)||2, 4, 8, 13, 26 or 52|
|LV=||£250,000||1 or 2 years and full term||93% paid out (2021)||4, 8, 13, 26 or 52|
|Royal London||£250,000||1, 2, 5 years and full term||90.4% paid out (2021)||4, 8, 13, 26 or 52|
|Shepherds Friendly||£49,000||1 or 2 years and full term||95% paid out (2021)||8,13, 26 or 52|
|The Exeter||£120,000||2 or 5 years and full term||93% paid out (2021)||1, 4, 8, 13, 26 or 52|
|Vitality||£120,000||2 years and full term||96.8% paid out (2020)||1, 4, 8, 13, 26 or 52|
|Wesleyan||£130,000 or £208,000 for doctors, dentists and lawyers||2 or 5 years and full term||98% paid out (2021)||0, 2, 4, 8, 13, 26 or 52|
|Zurich||£240,000||2 years and full term||85% paid out (2020)||4, 8, 13, 26, 52 or 104|
Below we summarise the top 10 Income protection policies in the UK
Aviva - Income protection policy summary
- Aviva has over 15 million customers in the UK and offers a wide range of insurance products, including income protection which it refers to as living costs protection.
- Customers can choose between full-term cover which will pay out for the whole time they are unable to work, or a shorter ‘limited payment term’ which will provide cover for up to two years.
- Policies will pay out 65% of the first £60,000 of gross earnings, plus 45% of any gross earnings above £60,000 to a maximum of £240,000 a year.
- Policies also provide a ‘hospital benefit’ that will pay for each night you are in hospital during the deferred period (if you stay in for more than six nights), as well as a ‘trauma benefit’ that will pay out if you suffer from blindness, deafness, loss of hand/foot, loss of speech, paralysis of limb or loss of independence.
- If you buy directly from Aviva, you can buy the Living Costs Protection which provides a monthly benefit for up to 12 months per claim but is limited to between £500 and £1,500 monthly benefit amount.
British Friendly - Income protection policy summary
- British Friendly was founded in 1902 and offers a range of investment-linked policies and income protection policies.
- Customers can choose from a full-term policy or a shorter-term policy providing cover for one, two or five years.
- Policies will pay out up to 70% of your annual taxable income if you’re employed and up to 70% of your pre-tax profits if you’re self-employed, up to a maximum of £45,500 a year.
L&G - Income protection policy summary
- L&G was founded in 1836 and offers insurance and investment products.
- Income protection customers can choose between full-term cover, or the ‘Low Cost Option’ which will provide cover for one or two years.
- A 'Low-Start' option will cost less to start but the monthly premiums will increase with age each year.
- Policies will pay out 60% of the first £60,000 of gross earnings, plus 50% of any gross earnings above £60,000 to a maximum of £240,000 a year.
- If you have been self-employed for less than 12 months then the maximum benefit is 35% of your gross earnings (up to £240,000 per year).
- Policies provide a ‘hospitalisation benefit’ which pays out if you have to stay in hospital for more than seven nights during your deferred period.
- Policies also provide life cover which will pay out an amount equal to 12 times the monthly premium (not the monthly benefit) if you die during the length of the policy.
LV= - Income protection policy summary
- LV= has over 1.16 million customers and offers a variety of products, including life insurance, income protection and investments.
- Income protection customers can choose between full-term cover, or the ‘Budget’ option which will provide cover for one or two years.
- Policies pay out up to 60% of your gross annual income, up to a maximum of £20,833 a month (level cover), or £250,000 a year.
- If you die before the end date of the policy it will pay out a fixed lump sum of up to £10,000.
- Policies also pay out a lump sum if you are diagnosed with a specified bone fracture or if your child is diagnosed with a specified illness.
Royal London - Income protection policy summary
- Royal London was founded in 1861 and offers a range of protection policies and pensions.
- Income protection customers can choose between full-term cover or a shorter-term cover that will pay out for one, two or five years.
- Policies pay out up to 65% of your first £15,000 of pre-tax earnings, plus up to 55% of the remainder, up to £250,000 a year.
- Fracture cover and hospitalisation payment (for stays of more than six consecutive nights during the deferred period) are offered as standard.
Shepherds Friendly - Income protection policy summary
- Shepherds Friendly was founded on Christmas Day in 1826. It offers a variety of savings products, as well as income protection and life insurance policies.
- Income protection customers can choose from a full-term policy or a shorter-term policy providing cover for one or two years.
- Policies pay up to 70% of your annual income up to a maximum of £49,000.
- If you are self-employed, your income is based on the average of the last three years’ annual net profit.
The Exeter - Income protection policy summary
- The Exeter, previously the Exeter Friendly Society, offers a range of insurance products, including income protection.
- Customers can choose from a full-term policy or a shorter-term policy providing cover for two or five years.
- Policies pay up to 60% of your taxable income up to £100,000 and up to 40% thereafter, up to a maximum of £10,000 a month (£120,000 a year).
- You can fix up to 75% of your initial benefit or up to £1,000 a month.
Vitality - Income protection policy summary
- Vitality is owned by Discovery Holdings and offers a range of insurance products. It also offers Vitality Rewards. See our Vitality review for more information on Vitality rewards.
- Income protection customers can choose from a full-term policy or a shorter-term policy providing cover for up to two years.
- Policies pay out up to 60% of your gross income for the first £60,000, and 50% thereafter - capped at £10,000 per month (£120,000 a year).
- You’ll receive a hospital benefit if you are hospitalised for more than six consecutive nights.
Wesleyan - Income protection policy summary
- Wesleyan was established in Birmingham in 1841 and offers a variety of products including savings and investments, mortgages and insurance.
- Income protection customers can choose from a full-term policy or a shorter-term policy providing cover for two or five years.
- The maximum weekly benefit is £2,500 (£130,000 a year) or £4,000 (£208,000 a year) for doctors, dentists and lawyers.
- To work out the benefit paid, your insurable income will be calculated by taking 60% of the first £40,000 of your income, adding on 55% of any income between £40,000 and £110,000 and adding on 50% of any income above £110,000.
Zurich - Income protection policy summary
- Zurich is a Swiss insurance company offering a wide range of savings, investments and insurance products.
- Income protection customers can choose from a full-term policy or a shorter-term policy providing cover for up to two years.
- Policies pay up to 80% of your gross annual income, up to £240,000 a year.
- The more comprehensive ‘Select’ policy offers a hospital benefit if you are hospitalised for more than six consecutive nights, and up to £50,000 if an accident or illness leaves you with a life-changing condition.
- The Select policy will also pay out up to £10,000 if you die during the term.
Which is the best income protection policy in the UK?
Deciding which income protection insurance policy is best for you will depend on how you define ‘best’. Some people may feel the best policy is the cheapest one, others may prefer a policy with added benefits such as hospital cover or a payout if you die, and others still may look at the company with the best claims statistics. To compare income protection policies means looking beyond the cost to the suitability of that insurance for your personal circumstances and the value for money it will provide.
When comparing income protection insurances bear in mind that how much you pay for your policy will depend on a variety of factors including your age, whether you smoke, your medical history, your job, the term of the policy, the deferred period and the benefit amount. Income protection policies that appear to be cheaper could limit key benefits and may even include standard exclusions that prevent the insurance from paying out for common claim reasons.
To ensure you are choosing the best income protection policy for you, it is a good idea to talk to an independent income protection specialist*. An independent income protection specialist will be able to access quotes from all major insurance companies and advise you on the best policy for your own personal circumstances. Additionally, they can help you to complete the application forms as well as help you in the future if you need to make a claim. Simply click on the link above and fill in the short form to get a quote, with no obligation to take things further. If you decide to take out a policy, you could receive up to £100 cashback.
Both those who are employed and those who are self-employed can benefit from taking out income protection insurance. State benefits for those who cannot work due to illness or an accident are low, so having the correct cover in place will ensure you still have an income and can afford to keep paying your mortgage or rent and household bills.
Alternatives to income protection insurance
There are a few alternatives to income protection insurance as we highlight below:
Accident sickness and unemployment (ASU)
This is a short-term policy that will pay out in the event you can’t work due to illness or an accident or if you lose your job. However, it should only be regarded as temporary cover as it will usually only pay out for 12 months. You may have to wait a month before you start receiving your payments. The application usually won't ask about your health so you can assume that most pre-existing conditions will be excluded from the cover but there are usually a fair few standard exclusions to payout as well, making the cover less desirable than income protection insurance.
Mortgage payment protection
This covers your mortgage payments if you become ill or have an accident and can no longer work, or if you are made redundant. Monthly payments only usually last for around one to two years and are usually capped. However, you may be able to choose a policy that will pay out 125% of your mortgage costs so that other bills will also be covered. You will normally need to wait one to three months before you start to receive your benefit. You are usually not covered for pre-existing health conditions and may see standard exclusions for conditions such as back pain and stress, depression and anxiety as these are high on the list of reasons for claims. You should always check the terms and conditions as policies vary in this respect.
This type of insurance is designed to cover your loan repayments if you couldn’t work due to illness, an accident or unemployment. Monthly benefits can last one to two years, but you may also be able to choose a longer-term policy. You will normally have to wait at least a month before you start getting a payout.
This provides cover due to involuntary redundancy and will usually pay you a monthly benefit for up to 12 months. It can be used to help pay your mortgage, other debts or bills and payouts can start immediately or after a deferred period. Be aware it is harder to get redundancy cover if you have been in your role less than six months, you’re over a certain age or if you work part-time.
Critical illness insurance
Critical illness insurance pays a lump sum of money if you are diagnosed with a serious illness that is listed in your policy terms. You may prefer to buy critical illness insurance over income protection insurance if you are only concerned about the diagnosis of serious illnesses such as cancer, heart disease and multiple sclerosis. However, critical illness insurance will usually only pay once and you are not covered after this whereas income protection insurance can be claimed against multiple times during your working life. In fact, most people will find that a combination of both types of illness insurance provide the best solution. You can read more about it in our article, "What is the difference between income protection and critical illness insurance?"
Saving the premiums in a savings account
You could even consider putting the amount you’d pay in premiums into a savings account and using this as your income protection. This would save you money on premiums, but there’s a high chance it wouldn’t be enough to cover your bills if you couldn’t work for a while, particularly as savings interest rates are so low. For example, if you put aside £40 a month, even after five years of saving, this would only give you £2,400 (excluding interest).
Does income protection insurance pay out for death?
In short, the answer is no, but some more comprehensive policies will pay out a fixed lump sum if you die to help your family cover funeral costs and so on - often up to around £10,000. However, this shouldn’t be seen as an alternative to life insurance (which typically pays out a lump sum if you die within a set term), as it is very unlikely to provide sufficient cover to protect your intended beneficiaries. There is a range of life insurance policy types so it is worth comparing your options carefully. You can read more in our article ‘Best and cheapest life insurance in the UK’.
For many people, it can be worth having both income protection and life insurance to make sure you are fully covered. Find out more about income protection insurance in our article ‘Income Protection - do you really need it?’
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