Beginner's guide to income protection insurance

What is income protection insurance?

Put simply, income protection is a life insurance policy that pays out a portion of your monthly income if you are incapable of working due to a defined illness or accidental injury. 

This type of insurance can be extremely beneficial for those who are self-employed and in turn do not receive sick pay. The tax-free monthly payments can help cover both the cost of living and essential bills. 

Our protection specialists typically advise income protection policies to cover you until you reach the age of 68, the state retirement age, this ensures you are covered throughout the entirety of your working life and offers long-term protection. However, our advisors will always consider your circumstances and budget when discussing financial protection and can provide other options such as short-term income protection cover which will insure you for a one or two year period. This can often be a more affordable option, while still providing financial security and peace of mind. 

Is income protection insurance worth it? 

If you have monthly outgoings and limited savings to keep you going, then income protection insurance is a great option for you. This type of policy will provide you with financial security if you were to become injured or sick and were unable to work as a result.

It is worth mentioning that those who are self-employed are not legally entitled to statutory sick pay, therefore, income protection is the ideal insurance policy for those who are self-employed as it offers a financial safety net.

However, it is not just for the self-employed, anyone who is reliant on their work income should really consider income protection insurance as it not only offers sufficient long-term financial protection, it also offers peace of mind.

Does income protection cover redundancy?

Each provider is different and offers different package deals, however, income protection insurance typically does not cover you in the event of either redundancy or employment termination.

Income protection’s main function is to assist the policyholder whilst they are unable to work due to sickness or injury, with the aim of helping them to return to work.

Do I need both critical illness insurance and income protection insurance?

Having multiple life insurance policies in place is hugely beneficial, especially as critical illness and income protection are completely different types of cover. Our protection specialists may advise you to take up both policies, especially if you are self-employed, but this is dependent on your circumstances and your affordability.

Critical illness insurance can pay a lump-sum to you if you are diagnosed with a defined illness, whereas, income protection insurance will pay monthly up to 75% of your usual income should you be unable to work due to illness or injury. Depending on your policy type, income protection policies can cover you for a set period of time, until you return to work or up to retirement.

How much does income protection insurance cost?

Typically, as with all life insurance policies, the higher the risk, the higher the cost. The same applies to income protection, the type of job you have will affect the monthly premium you pay.

Many insurance providers work from a ranking list of all different types of professions, each occupation gets put into a ‘class’ type, this class then determines the risk level of the profession. Each provider’s list is different, however, they will all follow a similar structure. For example, an admin clerk would be in Class 1 and a heavy manual worker would be in Class 5, as the risk of these employees becoming injured and unable to work differs. To summarize, the riskier your profession, the more you may pay for your insurance. 

Your policy will also be medically underwritten at the point of application, this is where you will answer various questions relating to your past and current health. The main factors being; smoker status, age, medical history, and current health. Depending on those and your occupation type is how your premiums will be calculated. Speaking to a protection specialist will help you to determine which insurance provider will be best suited to your health and occupation.

Is income protection taxable?

If you pay your monthly premiums for your income protection from your personal account then with current tax rules the regular payments under individual income protection policies are free from all forms of taxation. However, if your policy is paid for by your employer as a perk, your pay-out would be taxed via PAYE.