We’ve all heard of payment protection insurance (PPI), but mostly for the wrong reason: for being mis-sold to millions of people. PPI was a type of insurance sold alongside things like loans, credit cards, overdrafts, and mortgages. The point of it was to help cover your repayments if you couldn’t pay them yourself due to loss of income.
In the late 90s and early 00s, PPI was called out for being a low-value insurance product – expensive, yet full of exclusions. PPI policies drove big profits for the lenders, but in reality were extremely difficult to claim on, and largely worthless for consumers. In some cases, people were unaware they’d even been sold cover.
In 2011, the High Court ruled against the banks selling PPI and since then, millions of people have successfully claimed compensation after being mis-sold to. The consequent bad press surrounding PPI has made people sceptical about different kinds of insurance too – especially insurance designed to protect your income and monthly expenses, which somehow feels similar.
Income protection insurance is one product that people tend to confuse with PPI. But it’s actually a very different, inherently more valuable product. The main differences are that income protection covers a proportion of your income (PPI did not) and is medically underwritten at the point of sale (PPI was not). Let us explain more about the difference between PPI and income protection:
It's connected to your income, not your outgoings
This is one of the key differences between income protection and PPI. With income protection, insurers will cover part of your income, and you can use the money however’s needed in your circumstances. Typically, they’ll cover 50-60% of your salary, which should be enough to make sure your essential monthly expenses are covered – like the rent or mortgage, bills and food.
PPI, on the other hand, was linked to specific repayments – whether a personal loan, car finance, or mortgage. You could only be covered against those repayments, not against what you normally earn.
It's medically underwritten at the point of sale
Income protection is a policy designed to cover you for any medical reason that leaves you unable to work. In order to get covered, you have to through full medical underwriting with your insurer. This means disclosing the details of your personal and family health history, so they can weigh up how much of a risk you are to insure.
This process could make a difference to you if you have a pre-existing health condition. In this case, there’s a few possible outcomes. Depending what it is and how severe it is, your insurer might:
- Include your condition but charge you more to be insured
- Exclude your condition from your policy
- Decline your application
If the insurer accepts your application, regardless of any medical disclosures, your policy terms will be agreed and you’ll always be able to make a claim based on those terms. The terms won’t change in the future, whatever happens to your health.
PPI was not medically underwritten. This means it was very easy to take out, but people often ran into difficulties and faced exclusions when trying to claim. Sometimes, they weren’t aware of these exclusions in the first place. Income protection is a very different story, because you’ll be fully aware of potential exclusions before you even commit to buying the policy.
It can be bought on an ‘own occupation’ basis
Income protection policies will pay out if you meet your insurer’s definition of incapacity. One of these definitions is called ‘own occupation’ – which means you’ll be classed as incapacitated if you can’t do your own job. Most insurers will offer income protection on an own occupation basis, making it likely to pay out if you can’t work.
PPI could only be bought on a suited occupation or any occupation basis. That meant it would only pay out if you couldn’t do a suitable job or any job, not just the job you had at the time of needing to claim. A policy with suited or any occupation definition is less likely to pay out than a policy with own occupation definition.
It is very likely to pay out
In 2019, 87.2% of income protection claims were paid out across the whole market. Insurers tend to pay out the vast majority of income protection claims because it covers you for any medical reason that causes loss of income – regardless of what it is. It’s not like a critical illness policy, for example, which only covers you for a specific list of illnesses.
The fact that income protection is medically underwritten also boosts claim rates – because it means you have an opportunity to disclose your health history before agreeing terms with your insurer. It also means you’re very clear about what will and won’t be covered when taking out the policy.
Claim rates for PPI would have been much lower – because policies came with blanket exclusions and were not medically underwritten at the point of sale.
It could keep paying for as long as you need it
Income protection can be taken out on a full-term (or long-term) basis, which offers a very comprehensive level of cover. If you have a valid claim, a full-term policy would keep paying out until whichever one of these happens first:
- You’re well enough to go back to work
- You retire
- Your policy ends
PPI could only be taken out on a short-term basis. This meant it was only designed to cover your repayments for up to a year. If you still couldn’t work after that point, you’d no longer have the financial support of PPI.
Income protection can also be taken out on a short-term basis – but you can choose from maximum payment periods of 1, 2 or 5 years. This kind of policy is a more affordable alternative than full-term cover.
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- Income protection is not the same as PPI
- Income protection covers a % of your income, not specific repayments like PPI
- Income protection is medically underwritten when you buy it (PPI was not)
- Income protection can pay out you for as long as you need it, if you buy full-term cover, whereas PPI was capped at a year