Thinking about what your financial backup would be in case you become too ill to work is a sensible thing to do. Whether it’s relying on sick pay and savings, knowing there’s someone else who could support you while you get better, or taking out insurance to cover yourself – it’s important to know what you’d do if you found yourself in that boat.

However, most of us tend not to think about this scenario much. We like to think a health issue that stops us working isn’t something that’s likely to happen to us. And that even if it did, we’d be back on our feet quickly enough, so could probably make do financially.

This is why it’s natural to question whether an insurance policy like income protection is really worth it. How likely are you to use it? Would your savings be enough? What can income protection offer you that your savings can’t? These are valid questions to ask before taking out a long-term insurance policy.

Is it better to save or take out income protection?

Saving and taking out an income protection policy are not the same thing, so it’s hard to say whether one is better than the other. It all depends on your personal situation and what level of risk you’re happy (or not) to live with.

When working out whether it’s better for you to save or take out income protection – or both! – make sure you really think about the context. Imagine yourself in the scenario of being too ill to work and losing your income. With this in mind, you can really start to weigh up the pros and cons:

Savings Income protection
  • With rainy day savings, you could cope financially during short-term periods of illness or injury
  • If you don’t lose your income for health reasons, you’ll still have your savings
  • Income protection pays out 50-70% of your normal income if you can’t work for health reasons (this amount quickly adds up and would be hard to match with savings!)
  • Income protection keeps paying for a significant length of time (1, 2 or 5 years on a short-term policy, or for as long as you need on a full-term policy)
  • Paying a monthly premium in return for your income protection benefit is cheaper than saving the money yourself
  • Income protection actually protects your savings, meaning you don't have to use them to pay the bills if you lose your income
  • Cons
  • Your savings might not last long if you were using them to cover your monthly outgoings
  • If you do lose your income for health reasons, you might resent using your savings to pay the bills
  • Your savings might be set aside for something else – e.g. buying a home, paying for a life event, or reaching some other financial goal
  • Savings can be hard to build up again once they’ve been used up for something unexpected
  • As with any insurance, you might pay your monthly premiums but not end up needing to make a claim
  • Which is a better safety net: income protection or savings?

    It depends what the safety net is for and what kind of illness or injury you’re keen to protect yourself against. If you’re happy to be protected in case of short-term illness and don’t worry about the financial impact of being off work for a long time, perhaps your savings would be adequate.

    If, on the other hand, you want to be protected in case of long-term illness or injury – the kind of health event that causes you to lose your income for months or years at a time – income protection is usually the more comprehensive safety net. These kinds of policies pay out 50-70% of your normal monthly income; for most us, it would be impossible to have the same level of backup set aside in savings.

    How income protection can protect your savings

    Let’s imagine the scenario again: you’re too ill to work, you’ve lost your income, but there are still bills to be paid. If you’re using your hard-earned savings to cover your monthly outgoings, it wouldn’t take long for most of us to drain them. And once they’re gone, they can be very difficult to build back up.

    Income protection puts a stop to that. Once your monthly insurance payments kick in, you’d no longer need to use your savings to pay the bills. So you can keep them set aside for other emergencies or whatever it was you were saving for in the first place.

    How savings can make income protection cheaper

    If you’ve already got a bit of a safety net – i.e. you know you could tide yourself over without an income for a number of weeks or months – you’d be in a good position to reduce the cost of your income protection cover. This is because you could choose cover with a longer waiting period.

    All income protection policies come with a waiting period. This determines how quickly the policy pays out after you becoming too unwell to work. The longer you can wait, the cheaper your monthly premiums will be. And yet you’d still have peace of mind that your insurance payments would kick in just at the time you need them to.

    • Rainy day savings can help you tide yourself over during short-term periods of illness or injury, but might not do the job if you couldn't work for a long time
    • Income protection can help you tide yourself over during long-term periods of illness or injury
    • Savings are usually set aside for something in particular (e.g. a life event or financial goal) – so using them to pay the bills if you're off sick might not be ideal
    • Having savings can help make income protection more affordable because they mean you could choose a longer waiting period (which means cheaper monthly premiums)
    Do you need to protect your income? Let's work it out, starting with your age: