In this article, we'll examine why you might need income protection insurance, the factors that determine how much you pay, and how you might be able to save money on your policy. Let's get started.
Income protection insurance is a type of policy that pays out a percentage of your salary if you are unable to work because of illness or injury. You receive the payment each month, just as you would a salary. It's also tax-free.
In 2023, 247,000 people took out a new income protection policy. A 16% increase from 2022 .
There are many benefits to getting income protection insurance, but to truly judge whether it's worth purchasing, you need to know how much it costs.
There are many various factors that can affect your income protection monthly premium. You can divide them into two groups:
Let's look at each of these.
Income protection insurance will not cover your entire salary. Rather, you can select a percentage of your income to be covered by your income protection policy.
Most insurers will cover between 50% and 70%.
For example:
The higher your cover percentage, the higher your monthly premium is likely to be.
Your income protection insurance policy pays out until the term of the policy expires.
Many policyholders choose to align their income protection with their anticipated retirement age. For example, if they're 30 and they want to retire at 60, they take out a 30-year income protection policy, so they're covered for the rest of their working life.
The longer the term, the higher your income protection insurance cost.
It's also important to know that many insurers enforce a maximum age for coverage. Make sure you select an income protection policy that suits your needs.
The payment period of your income protection insurance is how long you'll continue to receive payments after a successful claim. Payment periods are
Naturally, long-term income protection is more expensive than short-term cover. However, you need to consider the impact of illness or injury on your ability to earn, as well as your personal circumstances.
The deferred period on your income protection insurance policy is the length of time that must elapse before you can start receiving payments after making a claim.
Insurers operate different deferred periods on their policies. Some can be as low as four weeks, while others could be an entire year.
The longer your deferred period, the lower your monthly premium is likely to be. Many policyholders choose a deferment period that aligns with when their sick pay runs out.
Income protection insurance policies differ in how they define the type of incapacity you need in order to make a claim. When you take out your policy, you can choose from three incapacity definitions:
Own occupation policies tend to be more expensive than the other two types, as the level of cover is higher.
Another choice you'll need to make when you take out income protection insurance is the type of premium. Select from:
If you choose reviewable or age-related premiums, you need to remember that the cost will rise during the lifetime of your policy. Think of it as an extra cost. Only a guaranteed premium allows you to see the full cost of your income protection insurance policy.
The level of income you earn will greatly affect your premiums for income protection insurance. If you're a high earner, the amount of money your insurer would need to pay out as a replacement income would be higher, so your premiums would be higher in turn.
If you work in a job where you're at a higher risk of injury (e.g. armed forces, firefighter, construction), you may pay higher premiums for your income protection insurance.
You can't help how old you are, but insurers charge higher premiums to older people. This is because older people are at a greater risk of health issues which may make them unable to work.
When you buy income protection insurance, you have to declare any pre-existing medical conditions. Depending on your pre-existing medical condition and its severity, you may need to pay higher premiums for your coverage.
You'll also be asked whether you smoke. If you do, you'll need to say how long you have been a smoker, how many cigarettes you smoke, and any impact smoking has had on your medical history. As with health insurance, smokers tend to pay higher premiums for income protection as they are a high risk for health problems.
To give you a clearer picture of how much income protection policies cost, we created a fictional person looking for a policy.
Our applicant is:
They're looking for:
We compared income protection insurance policies in the marketplace and this is the cheapest policy we found. You can see how prices vary depending on the age of the person applying:
Now you know how income protection insurance premiums are calculated and the kind of prices you might pay, let's look at how you can get the lowest prices for your policy:
However, the most important thing to remember when you buy income protection insurance is to be honest in your application. If your insurer discovers you made false statements during the application process, it could invalidate your policy. Then, if the worst happens and you need to claim, you won't get those income protection payments.
Carry on reading below for our Income protection insurance FAQ's.
Disclaimer: This information is general and what is best for you will depend on your personal circumstances. Please speak with a financial adviser or do your own research before making a decision.
Mike is a personal finance copywriter who has written for numerous financial services publications and websites over many years.
Unlike critical illness insurance, insurers do not tend to operate a preset list of conditions for income protection insurance. Essentially, if you can demonstrate that you are unable to work, you should be able to make a successful income protection claim.
The most common reasons that people make a claim on their income protection insurance are:
While income protection insurance will cover most illnesses and injuries that stop you from working, there are some examples that it will not cover, including:
Regarding unemployment and redundancy, while income protection insurance does not cover you if you lose your job, you can purchase a separate unemployment protection policy, which will pay out in this situation.
If you're successful with an income protection insurance claim, you'll begin to receive payments once your deferred period has passed.
After that, you'll receive payment until the first of these events occurs:
Of course, if you decide you're able to work again and get another job, you must stop your income protection insurance payments.
Unfortunately, if you pass away during the term of your income protection insurance policy, your loved ones will not receive a payout. Income protection insurance is only there to cover your income in the event of incapacity.
If you want to continue providing financial support to your loved ones if the worst happens and you pass away, you should take out a life insurance policy.
You do not get taxed on any payments from your income protection insurance.
It's the reason why insurers typically won't cover 100% of your income and cover you for a percentage of your income instead. That way, you don't need to pay for cover that would have generally gone to the HMRC.
However, it also means you'll never be better off staying on income protection cover than you would be working.
Income protection is intended to be a replacement income if you're unable to work, so most policyholders spend it in the same way they would spend their usual salary:
You might also use your payment to help your recovery, such as paying for private medical treatment or specialist equipment.
Income protection policies are not typically used to provide a nest egg for the future. Life insurance is more effective for this purpose.
The main thing an insurer will want to know is how much you're currently earning in your job. They can then decide how much cover to offer you.
However, they may also want to know about other sources of income, such as sideline jobs, state benefits you may receive, or investments you may hold.
There is no legal requirement to purchase an income protection policy when you get a mortgage. However, it's a time when many people decide it's the right course of action.
Consider what would happen if you were suddenly unable to work for a number of months. How would you be able to keep up to date with your monthly mortgage repayments?
If you have savings stashed away or other ways to support yourself, that's great. However, if you think you'll struggle to pay your mortgage without your income coming in, you should consider income protection insurance.
Talk to an experienced insurance broker for more information.
When you're self-employed, you only earn when you work. There's no sick pay or other benefits that you get when you're employed by a company. It's all down to you.
Purchasing an income protection policy is an effective way for self-employed people to give themselves a fallback if they were suddenly unable to work due to injury or illness.
You can sit back and focus on getting better without worrying about money. If you're on long-term income protection, your policy can support you until your retirement age.
Some employers offer group income protection to their employees as a working benefit. If your employer does this, you may not need to take out your own income protection policy. Check the terms of your employment contract.
After you purchase an income protection policy, you should have a 30-day cooling-off period where you can cancel your policy without being penalised.
However, if you cancel your policy after that period - or just stop paying your premiums - you won't receive any payment if you become ill or injured and cannot work. You're also likely to lose the money you have already paid in premiums.
