Guide to Income Protection Insurance

• Income protection insurance is not restricted to a narrow list of medical conditions: it covers all illnesses.
• Income protection can pay out for as long as you’re not able to work.
• With some income protection policies, you can claim again and again.

A payout from income protection insurance provides you with regular sums of money to replace the income you would lose as a result of ill health or an accident. It is designed to protect your finances while you recover.

It is a safety net that allows you to maintain your standard of living with minimal disruption if your ability to earn is interrupted.

Own Occupation cover will pay out if you are incapacitated and unable to do your usual occupation as a result. It is considered the highest form of cover as it pays out even if you could potentially still earn money in a different occupation.

Suited Occupation policies provide less coverage. With a Suited Occupation policy, insurers may not pay out if they believe you could return to work in another role that suits your skills, training, or experience.

Income protection insurance typically pays out 50-70% of your usual pre-tax income, but each provider sets their own limits. LV= will pay out a maximum of 60% of your monthly pre-tax earnings, for example.

No provider will allow you to take out more cover than you currently earn after tax and National Insurance contributions, however. But how much you choose to cover of your normal income is up to you.

You’ll hear this talked about a lot.
When you apply for income protection insurance, you’ll be asked to select how long you want your ‘deferred period’ to be. A deferred period is sometimes called a ‘waiting period’ and it simply means the period of time you choose to wait before payments begin.

Waiting periods generally range from 4 weeks to 12 months, but can be adjusted to fit your individual needs. Generally, the longer the period of time you choose to wait for your payments to begin, the cheaper your premium. So, it’s important to think carefully about how long you could manage without your regular income before needing assistance.

Many people calculate how long their savings would last, and/or how long any extended sick pay offered by their employer would allow them to maintain their normal lifestyle and cover bills. They then opt for a deferred period that starts at the end of that stretch of time.

The answer to this question is that it, of course, depends on your circumstances.

If you worry that losing your ability to work would result in you finding it difficult to keep up with expenses, then income protection insurance could provide you with peace of mind and a much-needed financial lifeline at a time you really need it.

It can be particularly beneficial if you:

• Are self-employed and don’t have the same protections someone in work may be able to fall back on
• Won’t receive sufficient sick pay to cover your expenses, or the period you’ll receive full-pay from your employer is very short
• Haven’t built up enough in personal savings to cover a period out of work
• Don’t have another source of income (e.g. partner’s wages) that could cover the shortfall if you stopped earning

The terms and conditions under which an Income protection insurance will pay out will vary from provider to provider, so it is important to carefully check the specifics of any policy you are considering. However, there are some common exclusions, which providers will not pay out for. Examples include:

• Pre-existing conditions
• Death of the policyholder
• Unemployment
• Redundancy
• Self-inflicted injuries
• Illnesses or injuries resulting from alcohol or drug abuse

Payments typically continue until you return to paid work or you retire, but you’ll need to check the specific terms and conditions of any policy you are considering for a definitive answer on this. Different providers operate in slightly different ways. Some policies specify a set amount of time, such as two years, after which payments will stop.

Providers will also stipulate conditions about when they consider you to be ready to return to work, so again, check the T&Cs carefully.

Most people use income protection insurance to help with the cost of:

• Rent or mortgage payments
• Household bills and utilities
• Childcare costs, clubs and children’s activities
• Credit card or loan repayments
• Food
• The cost of other activities or items that you would struggle to do without

However, there are no restrictions on how you use the money: it’s up to you how it’s used.

Your premiums (the ongoing payments for your cover) will vary depending on a number of different factors. They include:

• The number of years you want to cover
• Your normal monthly income
• The length of the waiting period (deferred period) you select
• Your age
• Your health
• Your personal and family medical history
• Your occupation
• Whether you participate in any risky activities
• Whether you smoke or vape
• How much alcohol you drink

Remember: Insurance policies will only provide cover as long as you continue to pay your premiums.

No, income protection payouts are tax-free

Yes, receiving income protection insurance may impact your eligibility for certain means-tested government benefits.

For example, your Universal Credit entitlement may be reduced. However, this is a complex issue and we strongly advise you seek advice from a financial advisor or benefits specialist if this is something you are concerned about.

Insurance policies are only valid as long as you continue to pay your premiums. If you stop, the policy will be terminated. If you are in financial difficulties, however, and struggling to afford your premiums, speak to your insurance provider as there may be alternatives to cancelling the policy. Some providers allow payment breaks, and there may be a possibility of transferring to a cheaper plan that means you don’t lose your cover altogether.

Anything we haven’t covered? Get in contact and let us know.