Choosing how much Income Protection you need isn't easy and there are lots of things that need to be considered. For the purpose of this article, we will assume you know what Income Protection is and that you have identified that it is a policy that you will benefit from having. If you need more information about Income Protection then check out our article 'Income Protection - Do you really need it?'.
We also explain how to get free guidance to arrange income protection insurance and get £100 cashback* if you do so.
How much Income Protection should you have?
The amount of income protection you need and should have may be different from how much you can get based on what you earn, so it is helpful to follow some steps to work out your needs. Further on, we look at how much income protection you can actually get. Here are a few questions to start you thinking about the various aspects of your situation that will determine the amount of income protection you need.
Cashback OfferUp to £100 cashback on income protection insurance
Our partner LifeSearch will help you get the best and cheapest income protection.
- Search the market and all the leading insurers
- Free advice with no obligation to purchase
- Up to £100 cashback for new customers
Are you entitled to sick pay?
The sick pay that you are entitled to could be what your employer pays you (as laid out in your employment contract) or state benefits that you qualify for and in many cases, it may be a combination of both of these.
If you are entitled to sick pay then this can reduce the amount of income protection that you need so you should check how much you would be paid and for how long. If your employment contract offers sick pay on a discretionary basis, you may wish to assess whether you can rely on this - if in doubt, you may be best off ignoring your employer's sick pay to avoid underinsuring yourself. State benefits, on the other hand, are usually more dependable and although the amount that you receive may be relatively small, they can usually be claimed in addition to any payments from your income protection insurance. State sick pay benefits can include statutory sick pay or employment and support allowance.
Is there another household income?
If your household is funded by more than one income, ensure you have considered how much of your essential outgoings can be covered by the other incomes into your household if you were unable to work due to illness or injury and only cover what you need.
Could your incapacity increase your expenses?
Some people may find that their outgoings and expenses would increase if they become incapacitated through illness or injury. You may care for children or adults within your household who will require replacement care at a cost. If you live in a household without people who can help you, you could find that you have to hire help for jobs like cleaning, cooking and perhaps even taking care of yourself. The expenses might not always be predictable but it is wise to have considered the impact of your illness on the money going out of your household and coming in.
Could your incapacity reduce your expenses?
In some scenarios, you may find that your expenses are reduced due to the fact that you are unable to participate in your normal activities, both work and leisure. For example, your travel costs to work may stop while you recover and you may go out for less meals and social events that would have otherwise been a regular part of your expenses.
How much Income Protection Insurance can I get?
Most insurance companies will provide a replacement income of up to 65% of your pre-tax salary. However, the benefit is not taxed and you can receive state benefits in addition to the income from your income protection insurance policy. So, you should be able to get close to what you earn but a little less to be incentivised to recover and return to work.
How to work out how much Income Protection insurance you need
Once you have established what additional benefits you may be entitled to, you should start making a list of your monthly outgoings and categorise your spending. You should split your spending into three lists, essential, moderate and non-essential.
Income Protection - understanding what you need to cover
A typical list for a sole wage earner, earning £42,000 and taking home £2,750 (with no existing benefits) may look like this:
| Essential | Moderate | Non-essential | |
| Mortgage / Rent | £800 | ||
| Groceries | £400 | ||
| Council Tax | £175 | ||
| Gas / Electricity | £85 | ||
| Insurances | £75 | ||
| Water | £50 | ||
| Petrol | £50 | ||
| Phone | £50 | ||
| Internet | £30 | ||
| Shopping | £400 | ||
| Savings | £300 | ||
| Eating Out | £275 | ||
| Cinema | £60 | ||
| Total | £1,585 | £130 | £1,035 |
In our example above, someone earning £42,000 and taking home around £2,750 per month would usually be permitted to insure around 65% of their income, totalling £1,787.50 per month. As you can see, this would ensure that the essentials are covered and in fact, it would leave enough to cover the items in the 'moderate' category as well, should they choose.
The likelihood is that the person above would qualify for some kind of employment and support allowance in addition and so this would leave some room to afford some discretionary spending in the non-essential category.
Of course, if there was an additional wage earner, this would impact the amount of cover required as bills would perhaps be split.
Income Protection - How to make sure you are buying the right policy
Before we look at how much income protection cover you need, we should quickly look at the type of cover you are buying and check that it is the right income protection policy for you. The cost of Income Protection isn't just impacted by the amount of cover you purchase; two of the biggest cost factors are the policy term (the length of time you take the policy) and the deferred period (the time that you need to remain incapacitated before the policy pays out).
Cashback OfferUp to £100 cashback on income protection insurance
Our partner LifeSearch will help you get the best and cheapest income protection.
- Search the market and all the leading insurers
- Free advice with no obligation to purchase
- Up to £100 cashback for new customers
How to reduce the cost of your Income Protection quote
In order to reduce the price of your Income Protection quote, you could consider one or more of the following:
Do you have any savings?
If you do, then you may want to use some savings in the first instance which means you can extend the deferred period of your policy. This could significantly reduce your income protection quote.
How long will your employer pay you while you are sick?
Make sure you know how long your employer will pay you sick pay and ensure that your deferred period is set so that Income Protection pays out after this time - the policy won't start paying you until you stop being paid by your employer.
How long do you need Income Protection to cover you?
Do you really need to take Income Protection insurance right up until retirement? Most pensions will allow you to draw down from age 55, so you may be able to shorten the term on your Income Protection insurance.
Consider short-term Income Protection
Short-term income protection provides the same benefits as income protection, however, the payment period is limited to 1, 2, 3, or 5 years per claim, costing you less in premiums. If you can afford it, you should always try to buy full income protection, but short-term income protection is certainly better than having no cover at all.
Summary
Hopefully, we've demonstrated that there is no, one simple answer when it comes to working out how much Income Protection insurance you need, but if you follow the steps above, you should be able to:
- Lower your Income Protection quote by ensuring you are buying the correct type of Income Protection cover, with the correct deferred period and over the right policy term
- Understand how much Income Protection insurance you need
Lastly, when comparing Income Protection quotes, it is always best to speak to an independent specialist. Online comparison sites and calculators are built to provide generic quotes and so they will not be able to give you a tailored quote based on your own unique personal circumstances. Before you proceed with your Income Protection quote, why don't you speak to an independent specialist* that we have personally vetted? They guarantee to beat any quote and also pay up to £100 cashback when you buy a policy with them. An independent specialist* can also help you to fill in the application forms, chase the insurance company on your behalf and even help you to make a claim should you need to.
To speak to an adviser, with no obligation to take out a policy, just fill in the form via the above link. The firm employs strong ethics and will only ever offer a policy if it is the best policy to suit your needs.
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. This 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
