20 min Read
18 Sep 2018

Income Protection – do you really need it?

Income Protection - do you really need it?

Income Protection - do you really need it?

What is income protection insurance?

  • Income protection insurance is an insurance policy that pays out an income if you are unable to work due to illness or an accident
  • Often referred to as sickness insurance or disability insurance
  • Payments usually continue until retirement, death or you return to work
  • Short-term income protection insurance is also available where payments are only paid for a limited period resulting in reduced monthly premiums
  • Income is paid after an agreed deferred period has passed, typically one to twelve months and the longer the deferred period the lower the monthly premiums
  • Payments are for a percentage of salary so that there still remains an incentive for policyholders to return to work. This is typically around 70% of your salary
  • Income protection insurance payouts are tax-free

Do you need income protection insurance?

  • We often think of illness as a couple of days off work with the flu and don't consider what would happen if we were off work for a longer period due to a serious illness or an accident
  • Many employees will continue paying employees salaries whilst they are unable to work but this could be limited to just a few weeks and therefore no income will be paid beyond that point
  • State benefits are low for people unable to work due to illness or accident so it is surprising that only around 9% of the public have any form of income protection
  • Premiums can be tailored to your budget as some cover is better than none
  • Income protection insurance does not cover redundancy under a basic income protection insurance policy but some insurance companies will provide redundancy cover (also known as redundancy insurance) as an option
  • Income protection is available for self-employed individuals but restrictions on payment levels and deferred periods may apply

How does income protection insurance work?

When you take out an income protection policy you will need to make a number of choices, the main ones being:

  • The monthly benefit amount you’d like to receive
  • This figure is typically capped at around 70% of your gross monthly income
  • The deferred period
  • The period of time after which you’d like the benefit payments to start
  • The term of cover
  • The number of years you’d like to be covered for
  • Benefit payment period
  • How long you’d like to receive monthly benefit payments from your policy for. In the case of long-term income protection, this could be until retirement.

Your income protection insurance plan will have a definition of incapacity, which is how the insurance company measures your inability to work and determines if you qualify for a claim on your policy. Typically this definition will be based on your ability to continue working in your current occupation. Insurers call this an ‘own occupation’ definition.

If you fall ill and become unable to work in your current occupation the insurer will start paying you a monthly benefit amount after the deferred period, and will continue to make these payments until either you return to work, your insurance comes to an end, or you die. The policy offers the ability to claim multiple times, so if you recover from your initial illness and return to work, you may be able to claim again in future if you fall ill once more.

Do you need life insurance and income protection?

Life insurance is an essential part of you and your family's finances but protecting your income in the event of illness or accident and is a key pillar to your future well-being. Many employees have some form of life cover and income protection insurance through their employer but this would disappear if they left their company or were made redundant. Premiums for both life insurance and income protection do not have to be expensive and can be tailored to your budget. Mortgage protection insurance is the cheapest form of insurance cover and will pay off your mortgage in the event of early death

How much income protection insurance do I need?

  • The maximum amount of income available under an income protection insurance will depend on the chosen insurer, typically between 50% & 75% of your current monthly income
  • You can have more than one income protection insurance policy but the level of cover will be capped by the insurance companies and reinsurers will ensure you don't go over the above limits
  • State benefits for illness are only around £100 per week and the full amount is not payable until after 14 weeks of time off work
  • The amount of income protection insurance you will need will depend on the amount of fixed outgoings (mortgage, bills, food etc.) you have on a monthly basis less the amount of benefits or other income that will be paid when you are off work
  • Once you have arrived at the level of cover you require then adjusting the deferred period can help manage the monthly premium to fit your budget, the longer the deferred period the lower the monthly premium

How much does income protection insurance cost?

The cost of income protection cover will vary greatly depending on your specific circumstances.  The monthly premium charged by the insurance company reflects your risk and the chances of you making a claim.  The higher your risk, the higher the monthly premium. Factors that insurers will consider are:

  • Age – the older you are, the more likely you are to develop health issues, and therefore the higher the premium
  • Job – the risker your job, the higher your chances of claiming, and the higher the premium
  • Smoker status – if you smoke your premiums will be higher because you may be in poorer health
  • Term – the longer you’re covered for, the greater your chances of claiming, and therefore the higher the premium
  • Deferred period – the shorter your deferred period, the higher the premium as the insurer will start paying out earlier
  • Benefit amount – the higher the income protection benefit, the higher the monthly premium
  • Benefit payment period – long-term income protection is more expensive than policyholders because you will be receiving benefit payments for longer
  • Medical history – if you have been ill in the past the insurer may increase your monthly premium if your past illness means that you are at a higher risk of claiming

Here are some comparison costs looking at the impact of age and the short-term period on the income protection monthly premiums charged.  The quotes are for a monthly benefit of £1,000, with cover until retirement and a long-term benefit payment period, assuming you are a non-smoker.

Deferred Period
4 weeks 13 weeks 52 weeks
Age 35 £32.87 £19.06 £16.28
40 £39.39 £23.65 £20.07
45 £52.60 £31.01 £25.28

To get a more accurate income protection insurance quote then this is the best Income protection quote calculator to use.

Find the cheapest income protection insurance

The best income protection quote tool we’ve found covering the whole of the market

Get an income protection insurance quote

Which is the best income protection insurance?

  • There are a number of insurance companies that provide income protection insurance and there is no one provider that provides the best income protection insurance
  • Income protection insurance providers view individual circumstances slightly differently and, therefore, will price their income protection insurance accordingly
  • Comparing income protection insurances is essential to get the best premium and cover to suit your needs.
  • if you’re fit and have a healthy lifestyle then Vitality has a unique income protection policy which rewards you but cutting premiums but also provides access to fantastic discounts and rewards designed. As described in my Vitality Life insurance review, I managed to save over £1,000 in rewards in the first year of the policy and received £250 cashback. Vitality has an impressive payout rate, approving 94% of claims in 2016. You can read my Vitality Income Protection review in full.

Compare income protection insurance

  • We have sourced the best income protection comparison tool in the market to allow you to quickly compare income protection insurance from the UK’s leading insurance companies. To get a quote that suits your needs follow the steps below:
  1. Click on the Income protection comparison tool
  2. Choose the type of cover you would like from:
    • Accident & Sickness
    • Accident, Sickness & Unemployment
    • Unemployment insurance only
  3. Enter how much income would you need a month to survive if you were unable to work
  4. Choose your deferment period from 1 week up to 52 weeks
  5. Select whether you are a smoker or a non-smoker
  6. Choose your occupation
  7. Enter your annual income and date of birth
  8. Click ‘See my results’ to see the cheapest income protection insurance for you

The cheapest income protection quote may not end up the cheapest once your case undergoes medical underwriting. That’s where the insurance company assesses the level of risk you pose to them and sets your premium accordingly. That is why if you have the chance to enter your phone number in the calculator then I recommend you do so. I’ve personally vetted the service provided by the company behind the calculator and they will advise you of the best company for your medical history to ensure your premiums are kept to a minimum.

Things to consider when taking out income protection

There are a number of things you should consider if you’re interested in taking out an income protection insurance policy, these are outlined below.

What is underwriting?

If you decide to apply for an income protection policy you will need to go through underwriting. The insurance company will ask you questions about yourself to better understand your risk, and will then be able to set your monthly premium. There are typically two types of underwriting with income protection cover, medical and financial. Medical underwriting involves questions around your health and allows the insurer to assess how healthy you are and your chances of illness. Financial underwriting involves questions around your financial situation, allowing them to correctly calculate the level of benefit you will receive if you claim. Some insurers do all of their financial underwriting upfront, others do this at claim stage.

What policy exclusions will be applied?

Exclusions are things that are not covered under your income protection policy. Insurance companies may apply exclusions to their income protection policies to ensure they aren’t exposed to unreasonable risks and to keep premiums at an affordable level. For example, companies may apply more general exclusions like alcohol and drug abuse, because engaging in these activities could lead to poor health and increased claims. They may also exclude any claims related to specific illnesses that you already have or are at high risk of developing. Each insurer will apply different exclusions so it’s important that you read the Key Features Document and other policy documentation carefully, it will contain everything you need to know.

What term should I choose?

The term of cover that you choose should reflect your specific circumstances. For example, if you’re only worried about covering your outgoings while you’re paying your mortgage, you could set your term of cover to match your remaining mortgage term. If however, you want to cover your outgoings for the full period of time that you’re working, you could set your term of cover to end when you retire.

What are my policy cancellation terms?

You can cancel your policy at any time, which means that your income protection cover will end and you no longer need to pay monthly premiums. There is no refund of premiums or cash in value if you do decide to cancel your policy.

How long will I have to wait before the policy pays out?

You can make a claim on your income protection policy as soon as it is active, however your monthly benefit won’t start being paid until after your deferred period, which you set at outset.

How much will I get if I make a claim?

You will receive the benefit level you requested when you applied for the policy. There will be a maximum cap on what you can receive from your policy. For example, if you chose to receive the maximum benefit level available, typically around 70% of your gross monthly income, other deductions will be made to the benefit to allow for any other sources of income, for example dividends. This will be the final capped monthly benefit amount. Ultimately the benefit you receive from your income protection policy should not put you in a better financial position than when you were working, otherwise there would be no incentive to go back to work!

How will the insurers assess how dangerous my job is?

Insurance companies categorise occupations into classes, with class 1 being the least risky and class 5 being the most risky. Your job is assessed at the underwriting stage when you apply for your policy. Each insurer will categorise occupations differently, so it’s worth getting premium quotes from a number of insurers.

Income protection insurance alternatives

There may be a number of reasons why you feel income protection insurance is not suitable for you. You may not need it or find it too expensive. Perhaps you’re not currently working, whether that’s due to illness, a career break or redundancy.

In these scenarios, there are other types of insurance product which may be more suitable for you:

Life insurance

This product will pay you a lump sum amount of money if you die during your term of cover. It’s typically used to cover any debt you have, for example to pay off your mortgage if you died. This product is cheaper than income protection insurance.

Critical illness

Critical illness insurance pays you a lump sum amount of money if you develop one of the defined illnesses covered by the policy during the term of cover. Again, this product is typically used to cover mortgage debt, however the payout from the policy can also be used to pay for private medical care or to supplement your income if you were unable to work. If you work in a higher risk occupation but are in good health, you should find that critical illness insurance is cheaper than income protection. There are lots of variables which can impact the price of both income protection and critical illness insurance so it is worth getting comparison quotes for both products.

Short term income protection

If price is a barrier for you with income protection it’s worth considering short-term income protection insurance. This product pays a monthly benefit for a limited period of time, typically 1, 2 or 5 years, and can have a significant impact on the premium. For example, take the 45 year old, with a 52 week deferred period in the premium table above. The long-term income protection premium is £25.28, however, the short-term income protection premium is only £10.21, which is half the price!

Article overview

Key points

What is income protection insurance?

  • Income protection insurance is an insurance policy that pays out an income if you are unable to work due to illness or an accident

Do I need income protection insurance?

  • Consider what would happen if you were off work for a long period due to a serious illness or an accident. How would you cope financially? Income protection will ensure you and your family don’t get into financial difficulty.

How much income protection insurance do you need?

  • The maximum amount of income available under an income protection insurance will depend on the chosen insurer, typically between 50% & 75% of current monthly income

How much does income protection insurance cost?

Written by Liam

Over 30 years experience in financial services, residential lettings and property sales. Director of a leading national estate agency chain, until leaving in 2008 to pursue other commercial interests. Vast experience in new business development, business change, management development and business strategy.

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