In this article we take a look at loss of earnings insurance explaining what it is, how it works, if you should buy it and how much it costs. We also explain what statutory sick pay benefits you may be entitled to and how much you may receive.
What is loss of earnings insurance?
Loss of earnings insurance - also known as income protection insurance - is an insurance policy that pays a tax-free sum of money in the event that you are unable to work due to an accident, injury or illness. Policies can cover up to 70% of your gross earnings and can be paid on top of any qualifying statutory benefits. Policies can be tailored to the specific job you do and pay out after a pre-determined period of time, usually when you stop receiving sick pay benefits through work.
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What are the different types of loss of earnings insurance?
Loss of earnings insurance can be a tricky area to navigate as there are many different types of insurance that cover loss of earnings. It is important to understand the difference between each type of income replacement policy and so we have provided a brief explanation of each of them below.
1. Accident, Sickness and Unemployment insurance - Good for those on a very tight budget
Accident, sickness and unemployment insurance - often referred to as ASU - is a short-term loss of earnings insurance that usually pays out a tax-free income for up to 12 months if you are unable to work due to an accident or sickness. As the name suggests, the cover would usually include unemployment insurance which will pay out if you are made involuntarily redundant from your job.
Accident, sickness and unemployment policies do not require full medical underwriting and so while they are the cheapest and simplest type of loss of earnings insurance to buy, there is less certainty as to whether they will actually pay out.
2. Short term Income Protection insurance - Good for those who want assurance that it will pay out
Short-term income protection insurance is a type of loss of earnings insurance that pays out a tax-free income for a maximum period, usually between 12 and 24 months in total. Short-term income protection policies are usually fully underwritten, which means that the insurer will assess your health upfront and you will know exactly what you are covered for. Policies can sometimes include redundancy insurance and can be tailored to pay out after a specific period of illness - typically 4, 8, 13, 26 or 52 weeks - helping to bring down the cost of the monthly premiums.
3. Long-term Income Protection insurance - Good for those with a slightly bigger budget
Long-term income protection insurance works in the same way as short-term income protection insurance but can continue to pay out a tax-free income for a much longer period of time, even up until retirement if required. It is the most comprehensive type of loss of earnings insurance and should be the first consideration for most people. Premiums are typically more expensive than any other type of loss of earnings insurance but the potential payout can be significantly more. If you are deciding between short-term and long-term income protection it would be wise to speak to an independent loss of earnings insurance specialist*. An independent specialist can compare every policy on the market and provide advice as to which plan best suits your needs. We explain more about the best way to buy loss of earnings insurance below.
How much does loss of earnings insurance cost?
It depends on the type of loss of earnings insurance you purchase. Short-term loss of earnings insurance policies are relatively cheap, however, if your illness or injury is prolonged you may find that you struggle financially when the benefit stops. Long-term loss of earnings insurance policies are typically more expensive, however, the benefits can be paid over a much longer time period, even up until retirement if needed.
Below we have provided example costs as well as compared the maximum potential payout for the main three types of loss of earnings insurance. You'll notice that long-term loss of earnings insurance is around double the cost of short-term loss of earnings insurance in our example, however, the maximum potential payout is almost twenty times as much as short-term income protection. The quotes below are based on a 30-year-old office-based worker looking to receive loss of earnings benefits of £1,750 per month. The policy would start paying the agreed monthly benefit after 13 weeks of illness.
Loss of earnings insurance comparison including cost and maximum potential payout
|Type of loss of earnings insurance||Example monthly cost||Maximum potential payout||Unemployment cover included||
Paid until retirement?
|Accident, Sickness & Unemployment (ASU)||£10||£21,000||Yes||No|
|Short term income protection (24 months)||£13||£42,000||No||No|
|Long term income protection||£25||£735,000||No||Yes|
What does loss of earnings insurance cover?
Loss of earnings insurance - more commonly referred to as income protection - provides a regular tax free monthly benefit in the event that you are unable to work due to any illness or injury. Some short term policies can include unemployment cover, however, most insurance companies are not currently providing this benefit owing to the pandemic. Most policies have a waiting period - often referred to as the 'deferred period' - that you will need to complete before the policy starts paying out. Waiting periods on loss of earnings insurance can be anything from 1 day up to 52 weeks and the longer you can wait before a policy starts paying out, the cheaper the policy will be.
What doesn’t loss of earnings insurance cover?
Loss of earnings insurance will pay out in the event of any illness or injury that prevents you from working, assuming you complete the required waiting period. One thing to look out for when buying loss of earnings insurance is the 'incapacity definition'. Depending on the type of job you do, you may be offered a policy with a 'suited' or 'daily work tasks' definition. This is a complex area but put simply, these definitions may mean that your loss of earnings insurance policy won't pay out if you can do a similar job or carry out some basic daily tasks such as getting dressed and showered. Most people will be offered loss of earnings insurance with an 'own occupation' incapacity definition which means that so long as you cannot carry out your current job, the policy will pay out. We explain these definitions in more detail in our article "A guide to Income Protection".
Another thing to note is that loss of earnings insurance policies are designed to replace lost income and so the benefit is paid monthly, rather than a one-off lump sum. Those looking for a policy that pays out a lump sum may want to consider critical illness insurance, which is a policy that pays out a guaranteed lump sum upon diagnosis of a specified illness or condition. Check out our article "What is critical illness cover?".
What statutory sick pay benefits am I entitled to and how much can I claim?
This will depend on a number of factors including whether you are unemployed, employed or self-employed and also whether you have paid class 1 or class 2 national insurance contributions. We provide a brief explanation of sick pay benefit entitlements below.
Statutory Sick Pay (SSP) - Benefit payable to employees
Statutory Sick Pay (SSP) is a benefit paid via your employer. The current benefit for the tax year 2023/24 is £109.40 per week and it can be claimed for up to 28 weeks. You would need to be ill for at least four consecutive working days in order to claim and you must earn a minimum of £123 per week on average in order to qualify.
Employment Support Allowance (ESA) - Benefit payable to employed, self-employed and unemployed and people
Employment Support Allowance (ESA) is a benefit that can be paid to employed, self-employed and unemployed people who have been working within the last 2 to 3 years. It is paid every two weeks. When first making a claim you will be placed in an assessment category where you could remain for a period up to 13 weeks. Those who are working reduced hours due to illness or injury and those who have exhausted their statutory sick pay entitlement could potentially claim Employment Support Allowance.
While being assessed for a claim you could receive:
- up to £67.20 a week if you’re aged under 25
- up to £84.80 a week if you’re aged 25 or over
After your claim has been assessed you could receive:
- up to £84.80 a week if you’re placed in the work-related activity group
- up to £128.85 a week if you’re placed in the support group
Claiming statutory benefits related to coronavirus
There are complex rules regarding claiming statutory benefits due to coronavirus and these rules are constantly monitored and regularly amended. If you think you may have an eligible claim then it would be wise to follow government guidance by clicking the appropriate link for Statutory Sick Pay or Employment Support Allowance.
Do I need loss of earnings insurance?
Most people would benefit from having some form of loss of earnings insurance. Policies can be tailored to your individual needs meaning you can bring down the cost of the cover if you have existing work benefits or savings to fall back on. You may decide loss of earnings insurance is not a top priority if:
- You have significant savings to fall back on
- Another family member is happy and able to support you financially
- You can take early retirement
- You receive a passive income
- You receive existing sick pay benefits through your employer
How to buy the best and cheapest loss of earnings insurance policy
Loss of earnings insurance can be complex and with so many options to consider it would be wise to speak to an independent loss of earnings insurance specialist. An independent specialist will have access to every type of policy on the market and can tailor a policy to your specific budget.
Insurance to protect your income can be a vital lifeline until you have recovered and returned to work.
We have partnered with one of the leading independent income protection specialists in the UK* who will be happy to answer any questions you have and provide you with tailored quotes and expert advice. They will even pay up to £100 cashback if you take out a policy with them. Click on the link to speak to them at a time that is convenient for you and with no obligation to take things further.
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