Income protection is an insurance policy that pays out monthly if you lose your income for medical reasons. It covers you for any medical reason (physical or mental, illness or injury), so long as you've been signed off work by a health professional. The idea is to cover part of your income, making sure you'll always have money coming in, even if you're too unwell to work.

No-one knows what the future will bring, but having this kind of cover in place gives you peace of mind that you'll always be able to manage financially – regardless of any health problems that come your way.

How income protection works

What is income protection?

When you take out an income protection policy, you pay monthly premiums to be insured. You can then make a claim if you need to take time out from work due to ill health. If your claim is valid, you'll receive monthly income protection payments after your waiting period has elapsed.

You decide when you take out the policy how much money you’d like to receive each month if you can't work for health reasons. Bear in mind that many insurers will set your monthly ‘benefit’ at a maximum of 50-60% of your pre-tax income (which is usually enough to make sure life's essentials would be covered).

Income protection waiting period

All income protection policies have a waiting period. This refers to the time between becoming unable to work and the day you receive your first income protection payment. It could be anything between 1 and 52 weeks, which you’ll agree to when you first take out a policy, depending on how quickly you'd need the policy to pay out.

What is an income protection waiting period?

In general, if you opt for a longer waiting period, you’ll pay lower monthly premiums – but you’ll need to make sure you have the financial means to meet your living costs during the waiting period. Similarly, by selecting a shorter waiting period, you can access the benefit sooner, but you’ll pay higher premiums to be insured.

How waiting period affects price of income protection

Full-term and short-term cover

These are the two main types of income protection insurance. The difference between the two being the maximum amount of time you can claim monthly payments for. With full-term cover, you can claim for as long as you need to – until you're well enough to go back to work or your policy ends. With short-term cover, you'll have a maximum amount of time you can receive payments for per claim, agreed when you take out the policy – e.g. 1 or 2 years. Full-term is more expensive but more comprehensive than short-term cover.

Difference between full-term and short-term income protection

Who needs income protection?

Most working adults need income protection because, in reality, most of us have financial commitments and would be financially affected if we lost our income. If you have a partner, children, or other dependents, the need to protect your income could be greater still – because any loss of earnings could impact your ability to support not only yourself, but those you love too. Income protection can be particularly valuable for:

Whatever your situation, it can be helpful to think about it in terms of what your alternative would be if you lost your income. What backup do you have? Without income protection, you might be able to manage for a short while if you're off work for medical reasons, by temporarily changing your lifestyle, borrowing money, or relying on others. But over the long term, for many people, the financial impact of losing your income could quickly spiral into significant consequences – from permanent lifestyle changes to lost savings.

Many of us have a tendency to think we’re invincible and to bury our heads in the sand when it comes to likelihood of us getting ill. But the chances of being too ill to work for a while are often higher than we think – because of illnesses or accidents that could happen to anyone.

Most commonly claimed-for conditions on an income protection policy

It's very sensible to stop and think: if you experienced an unexpected health problem that forced you to stop work, would you and your loved ones be able to cope financially? If not, income protection is one way of having a backup plan in place.

When should I take out income protection?

Many people choose to take out income protection insurance when they reach certain life milestones – like buying a property, getting married, or having children. That’s because they're moments in time when you're taking on greater financial responsibilities, and you realise that if your health were compromised, your ability to meet these responsibilities would be too.

Another common trigger is becoming self-employed, because you stop automatically having the same protections – like sick pay – that a permanent employee is entitled to. As a self-employed worker, being off work for health reasons could impact your ability to provide for yourself and others more quickly and more significantly than it otherwise would.

Sometimes, the importance of having income protection will simply dawn on you because of something less tangible. Like someone you know losing their income because they're ill or injured. Or simply the fact that you're getting older and becoming more aware of your own susceptibility to ill health. Whatever the motivation, having income protection in place can be invaluable, no matter what stage of life you're at.

Is income protection insurance worth it?

No-one likes to spend any more than they need to, but the fact is: income protection insurance could provide an essential financial lifeline when you and those you care about need it most. It's true there are other types of cover to think about, especially if you've got dependents – like life insurance and critical illness cover – but income protection is definitely one to consider if you value certainty and stability as you plan your family's financial future.

Let's work out if you need income protection. First, how old are you?
  • Income protection insurance pays out a monthly benefit if you’re unable to work for any medical reason
  • Income protection doesn't pay out for any other kind of income loss, like redundancy
  • Anyone who’d be affected by losing their income could benefit from having income protection in place
  • Income protection makes sure you can cope financially if you're off work for medical reasons without having to change your lifestyle, use up savings, or take on debt
  • In particular, income protection can be important for those with dependents, and for self-employed people who don't have benefits like sick pay through work