Income protection is a kind of insurance policy that covers you if you’re medically unable to work. It can be a financial lifeline if you lose your income for this reason – at a time when money should be the least of your worries.
Lots of people don’t have this kind of protection in place. One reason for this is because it can be pretty complicated to buy, as there are lots of factors to think about and ‘settings’ to choose when buying a policy. This means many people are living with the financial risk of losing their income for health reasons – which is one of those things that could happen to any of us.
In this guide, we’ll explain what factors affect your need for income protection, so you can move towards getting the right cover in place for you and your circumstances. We’ll also explain why getting expert help can make all the difference in making informed decisions about the insurance you buy.
Things to consider when buying income protection
Your monthly outgoings
This is what income protection is there to help protect. It pays out a monthly amount if your health stops you working, making sure you’ve always got an income and can cover your monthly expenses.
Since income protection won’t cover your entire income, it’s worth thinking about the essential things you'd need to pay for without an income. This is usually your rent or mortgage, bills, food, transport, etc. It might be that you need to cut down on some other non-essential spending if you lose your income, but income protection should be able to help you cover the essentials.
Income protection pays out a monthly amount if your health stops you working, making sure you’ve always got an income and are able to cover your monthly expenses.
Your existing financial backup
If you couldn’t work for health reasons, how long could you cope financially? What means do you have to support yourself? This could be:
- Sick pay: If you’re employed, you might have employer sick pay, and you’ll definitely have statutory sick pay. This could tide you over for a number of weeks – but could you cope financially beyond that point? If you’re self-employed, you won’t have any sick pay, so the need for financial backup might be even more pressing.
- Savings: Do you have any savings you could lean on if you lost your income? How much or how long would you be willing to use them for? Bear in mind that using up savings could set you back in other ways and affect your future plans. If you don’t have any savings, again, your need for financial backup could be pressing if you lost your income.
- Partner/family/friends: You might have someone else you could rely on financially if you lost your income for health reasons – but for how long? For most people, there’s a limit on how far this could go. It’s important to think about how you’d support yourself without this option.
You might have all or some of these backups at your disposal, but income protection is designed to protect you at the point when you run out of financial alternatives. It can also prevent you from doing something you’re not comfortable with or can ill afford – like using up savings, leaning on someone else for financial support, taking on debt, or significantly changing your lifestyle.
Income protection is designed to protect you when you run out of financial alternatives. It can also stop you from, using up savings, borrowing money, or significantly changing your lifestyle.
How long you need cover
Most people need income protection in place for as long as they’d face a financial shortfall without an income. This is because most households base their outgoings on what they know is coming in each month, so any disruption to your income could have significant financial consequences. The need tends to be most pressing when you’ve got financial commitments and dependents – both of which come with essential monthly outgoings that don’t go away when you can’t work.
Being off work at some point during your career because of your health is fairly likely. Illness and accidents happen to us all. For this reason, some people choose to cover themselves up until retirement, so they know their income will be insured for as long as they have it. Alternatively, you can choose a different policy term – e.g. 10, 20 or 30 years – depending how old you are when you take out the policy and how long you think you need cover in place.
Income protection policy features
You’ll have to make a few decisions about the income protection policy you buy. Knowing what these are and what effect they’ll have on how and when your policy pays out is crucial. Here’s a breakdown of the key features, but you can read more in our income protection glossary.
|Your cover amount
|This is how much of your income is insured – i.e. the monthly payment you’d receive if you needed to make a claim. Insurers will usually cover between 50% and 60% of your pre-tax income, which is usually enough to cover your essential outgoings.
|Your policy term
|This is how long you’ll be insured for. People commonly cover themselves for their whole working life, until retirement. Alternatively, you can choose a different policy term – e.g. a set number of years – according to how long you think you’d need financial backup if you lost your income for health reasons.
|Your waiting period
|This is how long you need to be signed off work before you can start receiving your monthly income protection payments. Generally, the longer the waiting period, the cheaper your premiums, and vice versa. Bear in mind that you need to be able to support yourself financially during your waiting period.
|Short-term or full-term cover
|This is all about how long your policy will pay out for per claim. Short-term cover pays out for a maximum payment period, agreed when you take out the policy; full-term cover pays out for as long as you’re unable to work, however long that is (provided you’re still insured). Short-term cover is cheaper than full-term cover, but always stops paying after the max. payment period, even if you still can’t work.
|Guaranteed or reviewable premiums
|Your premiums can either be guaranteed or reviewable. Guaranteed premiums will always stay the same (or go up at a guaranteed rate) for as long as you hold the policy; reviewable premiums will be reviewed at regular intervals, so you won’t know when you take out the policy how much it’ll cost in the future.
|Age-banded or level premiums
|Your premiums will also be either age-banded or level. Age-banded premiums will go up with age, to reflect your increased risk of illness; level premiums will always stay the same, as agreed when you took out the policy, for as long as you hold the policy.
|Your insurer’s definition of incapacity
|Your income protection policy will only pay out if you meet your insurer’s definition of incapacity – i.e. their definition of you being unable to work. ‘Own occupation’ is the most favourable, as it pays out if you’re unable to do your own job, while others can be stricter – e.g. any occupation, suited occupation or activities of daily living definitions. Read what each of these means in our glossary.
What’s the right income protection cover for you?
This is entirely down to you and your unique circumstances. In particular, what essential outgoings you have and whether or not you have financial dependents – but also what alternatives you already have in place to support yourself if you couldn’t work for a long time.
We always say that the ‘right’ cover for you is the policy that suits your needs, profile and budget. It’s about balancing all three. Your needs, so the policy would cover the things you need it to and pay out when you need it to; your profile, because some insurers may be more suitable for you than others, based on your health and/or lifestyle; and your budget, because what you can afford and what you’re happy to spend on insurance is paramount.
Do you need to speak to an adviser to buy cover?
You don’t have to, but in most cases it helps. Income protection can be complex, and there are lots of decisions to make when buying cover – and that's before you get to choosing an insurer and a policy. An adviser knows the market, so they’ll be able to look at your circumstances, gauge your wants and needs, and match you to the most suitable insurers and policies available. They might also prompt you to think about vulnerabilities and/or options that you hadn’t thought about.
- The income protection you buy should be suitable for your needs, profile and budget
- To work out what income protection buy, you should consider your monthly outgoings, what financial backup you already have, and how long you’d face a financial shortfall if you couldn’t work
- There are lots of settings to choose when buying cover – it’s important to understand what these are and how they will affect your policy
- Getting expert advice can help give you peace of mind that you’ve chosen the right cover for you