What is Income Protection insurance – 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 when you return to work
• Short-term income protection insurance is also available where payments are 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 between 50-70% of your pre-taxed salary
• Income protection insurance payouts are tax-free

Do you need income protection insurance?

If you are dependent on your income to live and require your physical and mental health to generate the income you live on then yes, you probably do need income protection insurance.

Here are some things that you should consider to work out if 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 employers will continue paying employees' salaries whilst they are unable to work but this could be limited to just a few days or weeks and therefore no income will be paid beyond that point
• State benefits are low for people unable to work due to illness or injury so it is surprising that only around 6% of the public have any form of income protection insurance
• The price you pay for income protection insurance, your premiums, can be tailored to your budget as some cover is better than none
• Income protection insurance does not cover redundancy but some insurance companies will provide redundancy cover (also known as redundancy insurance or unemployment cover) as an additional option
• Income protection is available for self-employed individuals but restrictions on payment levels and deferred periods may apply

Cashback Offer

Up 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

Get Advice Now*

How does income protection insurance work?

Income protection insurance covers your ability to work and if you become unable to work due to illness or injury, you can claim the insured benefit amount. The policy will pay out after the waiting period you choose, and you will keep receiving this until you are able to return to work – some policies pay for a limited period and most will stop payout out once you reach retirement age.

When you buy income protection insurance you will need to make a number of choices, the main ones being:

• The monthly benefit – this is the amount you’d like to receive to replace your lost income and is typically capped at around 70% of your gross monthly income
• The deferred period – although policies can start paying from day 1 of your incapacity, most do so after a waiting period that you choose (1, 4, 8, 13, 26 or 52 weeks)
• The term of cover – income protection insurance is a permanent insurance which means you don't have to renew it each year and the term is usually the number of years until you retire (you can cancel or review your cover at any time)
• Benefit payment period – the income protection can continue to provide you with your insurance benefit until you can return to work or retire but you can also choose a limited period to reduce the cost of the insurance

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. Not all income protection insurance companies provide cover against your ability to do your own occupation, especially if your own job is very manual or one that carries extra risks.

Some insurance companies provide more comprehensive and often cheaper insurance for particular occupations. The other definitions of incapacity that you might come across are ‘any occupation'; ‘suited occupation' or ‘work tasks' which measure your inability to work differently. We look at these in more detail in our article, “Sick pay insurance – occupation incapacity definitions explained”

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 the future if you become incapacitated for the same or a different reason.

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 will affect the cost of income protection insurance

• 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 because the insurer may carry on making payments for a number of years or until you retire compared with budget options that come with capped benefit terms of 1,2 or 5 years 
• 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 when buying income protection 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.

Monthly price of £1,000 monthly income protection insurance to age 65

• The premiums quoted here are fixed and guaranteed to the age of 65 once you start your policy but you can get cheaper quotes that will increase with your age each year or may be reviewed from time to time.
• All quotes are correct as of 3rd October 2024

To get a more accurate income protection insurance quote then you should speak to an independent income protection specialist such as Lifesearch*. An independent income protection specialist will be able to access quotes from all major insurance companies and give you advice on the best policy for your own personal circumstances. LifeSearch also provides up to £100 cashback if you decide to take out a policy, although there is no obligation to do so.

Do you need life insurance and income protection?

Life insurance is an essential part of your and your family's finances but protecting your income in the event of an illness or injury 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 life insurance 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% & 70% of your current pre-tax monthly income
• You can have more than one income protection insurance policy but the level of payout, if you need to claim, will be capped by the insurance companies and reinsurers will ensure you don't exceed these limits based on what you were earning before you became unable to work. It is therefore important to be careful that you don't overinsure your earnings.
• State benefits in the form of statutory sick pay (SSP) are £116.75 per week and only pay for a maximum of 28 weeks
• 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

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 for everyone
• Income protection insurance providers view individual circumstances slightly differently and will therefore price their income protection insurance accordingly
• There are a handful of specialist income protection insurers that specialise in income protection insurance for manual workers or jobs that carry extra risks – they can be cheaper.
• Comparing income protection insurance is essential to get the best premium and a cover that gives you the best outcome if you need to claim.
• If you’re fit and have a healthy lifestyle then Vitality has a unique income protection policy that rewards you by discounting your monthly premiums but also provides access to fantastic discounts and rewards. 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 £100 cashback. Vitality has an impressive payout rate, approving 95.4% of claims in 2023. You can read my Vitality Income Protection review in full.

Compare income protection insurance

The best way to compare income protection insurance is to use an independent income protection specialist. LifeSearch is a specialist broker whose service we have vetted. They will quickly compare income protection insurance quotes from the UK’s leading insurance companies. To get a quote that suits your needs follow the steps below:

1. Click on this Income protection insurance quote request*
2. Input the following:
   • First name
   • Surname
   • Email
   • Telephone number
   • Preferred contact time
3. Click ‘Book a call back'
4. Alternatively, if you want to speak to a LifeSearch adviser sooner rather than later then you can do so by calling 0203 764 0275.

Remember, when comparing income protection quotes online via a comparison site, the quote you receive may not be the cheapest once your application is assessed. That's where the insurance company assesses the level of risk you pose to them and sets your premium accordingly. That is why it is always best to speak to a specialist as they can discuss your health upfront and select the insurance company that will treat you the fairest. They do all of the hard work for you ensuring that you get the very best price.

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 about your health and allows the insurer to assess how healthy you are and your chances of illness. Financial underwriting involves questions about your income, 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 the 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 ill health and increased claims. These are referred to as standard exclusions and will be the same for all policyholders.

Insurers may also exclude any claims related to specific illnesses that you already have or are at high risk of developing. If an exclusion is added after your application is assessed, you should be told about it so that you can decide whether the exclusion is acceptable to you.

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. Insurers differ in terms of how they assess your application and not all insurers will exclude pre-existing medical conditions – you should speak to a specialist adviser to get the best terms for your policy.

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.

Choosing a longer term can be sensible because your premium can be fixed from when you start your policy – the younger you are, the cheaper your premium. You can always cancel your income protection when you no longer feel you need to protect your income.

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 waiting period which is called the deferred period – you will have chosen this at outset. If you use our recommended income protection specialist*, they have a dedicated claims team and so would be able to help you if you ever needed to make a claim on the policy.

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 riskiest. 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 or even better, speak to an independent specialist as they will be able to gather 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, can't qualify for it due to the type of work you do 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 products that may still be suitable for you:

Life insurance

This product will pay 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 or to leave money for your family. 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 cover 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 26-week deferred period in the premium table above. The long-term income protection premium is £24.52, however, the short-term income protection premium is only £8.20, which is half the price and gives 12 months of breathing space!

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