9 min Read
08 Jul 2019

Written by Andy

How much Income Protection do I need?

How much Income protection do I needChoosing 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?'

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 for) and the deferred period (the time that you need to remain incapacitated before the policy pays out)

How to bring down your Income Protection quote

In order to bring down 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 bring down your Income Protection quote.

How long will your employer pay you for while you are sick?

Make sure you know how long your employer will pay you for and ensure that your deferred period is set so that Income Protection pays out after this time.

How long do you need Income Protection to cover you for?

Do you really need to take Income Protection insurance right up until retirement? Most pensions will allow you to draw down from age 55 and 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 benefit as Income Protection, however, the period in which it will pay out for is reduced, often to 12 or 24 months. If you can afford it, you should always try and buy full Income Protection, but short term Income Protection is certainly better than having no cover at all.

How much Income Protection should you have?

To answer this, we need to take a few things into consideration:

Do you get any benefits? (or will you if you are incapacitated)

Check that any benefits you currently receive will continue to be paid and also check whether you will be entitled to any potential future benefits through incapacitation, such as employment and support allowance.

Are you the main wage earner?

If you are not the main wage earner, you may want to consider taking less cover. Often, the main wage earner's salary goes towards essentials, such as mortgage repayments, groceries and utilities, while the lower earner's salary is often used for discretionary spending such as eating out and shopping.

Think about your future lifestyle should you become incapacitated

Remember that if you are unable to work due to ill-health, your lifestyle is likely to change. It is unlikely that you will be well enough to go on holidays, shopping trips or eating out with friends and as a result, you will be able to survive on less money

How much Income Protection Insurance can I get?

Most insurance companies will allow you to insure up to around 65% of your earned income or around £40,000, whichever is higher. The reason it is capped at around 65% is that most people will qualify for additional incapacity benefits and these are paid on top of the Income Protection benefit payment. The insurers are also aware that there is likely to be a lifestyle change (as explained above) and above all, capping the benefit means that there is an incentive to 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.

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 allowed 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.

Summary

Hopefully, we've demonstrated that there is not 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:

  1. 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
  2. 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 £50 cashback when you takeout 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 will 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.

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