What is income protection insurance? Formerly known as permanent health insurance, income protection is an insurance policy that pays out if you're unable to work because of injury or illness. Income protection usually pays out until retirement, death or your return to work, although short-term income protection policies, which last for one or two years, are also available at a lower cost. Neither income protection or short-term income protection pays out if you're made redundant - but they will often provide 'back to work' help if you're off sick. Income protection is different from critical illness insurance, which pays out a lump sum if you fall seriously ill.
Looking to buy protection insurance?
If you decide you need advice, make sure you consult an independent life insurance and protection broker. Which? Financial Services can refer you to an impartial, no-obligation third-party advice service to provide you with the best life insurance, protection or mortgage insurance policy tailored to your individual needs.
Is income protection the same as PPI?
Let's be clear - income protection isn't the same as the widely mis-sold payment protection insurance (PPI). Where PPI covers a particular debt and any payouts go to your lender, income protection hands you a tax-free proportion of your income if you're unable to work because of illness or injury. If you think you've been mis-sold PPI, you can put in a complaint using our free PPI tool. As the deadline passed on 29 August 2019, you can only claim if exceptional circumstances apply. The Financial Ombudsman Service has indicated a serious illness or family bereavement would be considered, although this will be assessed on a case-by-case basis. You may be able to submit a PPI complaint if you were sold the PPI policy after 29 August 2017.
Why do I need income protection insurance?
Only a minority of employers support their staff for more than a year if they're off sick from work. Given the low level of state benefits available, everyone of working age should consider income protection. But when we asked the public, just 9% said they have some form of income protection, compared with 41% who have life insurance and 16% who have private health insurance. Millions of us have policies such as private health insurance and payment protection insurance, sold to us over the years by salespeople who convinced us we needed protecting. However, while they were right about the protection, they were often wrong about the policies. The one protection policy every working adult in the UK should consider is the very one most of us don't have - income protection.
How much does income protection cost?
Your health, whether you smoke and level of cover needed will weigh into your premium, but your type of job also plays a major part in determining what you'll pay. Many insurers group jobs into four categories of risk, though some have more. For example, jobs may be divided into the following groups:
Class 1:
Professional; managers; administrative staff; staff with limited business mileage; admin clerk; computer programmer; secretary.
Class 2:
Some workers with high business mileage; skilled manual work; engineer; florist; shop assistant
Class 3:
Skilled manual workers and some semi-skilled workers; care worker; plumber; teacher
Class 4:
Heavy manual workers and some unskilled workers; bar person; construction worker; mechanic
The riskier the type of job you have, the more likely it is that you may need to make a claim. Therefore, those in the riskiest occupations tend to pay higher premiums.
How much does income protection pay out?
Income protection payouts are usually based on a percentage of your earnings: 50% to 70% is the norm. Sometimes, an insurer might pay out a higher percentage of one portion of your salary (perhaps the first £50,000), and a lower percentage on anything above that. For example, say you earn £40,000 a year, and you take out an income protection policy designed to pay out 60% of your salary. Over the course of a year, your policy will pay out £40,000 x 60% = £24,000. The good news is that payments from income protection policies are made free of income tax.
When does income protection pay out?
Income protection policies pay out only once a pre-agreed period has passed, generally ranging from one to 12 months after you put in a claim. The longer the 'deferral' period you choose, the lower your premiums. The default deferral period tends to be 13 or 26 weeks, but it can sometimes be as low as four weeks. How an income protection insurer defines your inability to work will also influence if and when your income protection policy pays out. There are three methods insurers use: activities of daily living, suited occupation, and own occupation.
What is 'index-linked' income protection? Inflation is an important thing to consider when taking out an income protection policy. When you are working, you'd hope that you would be getting an increase in your salary to ensure that your pay keeps up with the rising cost of living. But if you come to claim on an income protection policy that only pays out a proportion of your salary today and doesn't account for future rises, the amount you receive will be worth less and less over the years. You have to option to add an 'index-link' to your income protection, meaning it rises with a measure of inflation, such as the consumer prices index (CPI) or the retail prices index (RPI), each year. This will increase your premiums each year, too. They're usually increased by a little more than inflation.
What is 'stepped benefit' income protection?
When deciding what type of income protection you need, you should always check with your employer to see what sickness benefits they pay. If, for example, your employer pays you in full for a period, then reduces how much it will pay you, 'stepped' income protection could be useful. With this, you can choose two different levels of payment, designed to pay out after different time periods. So, you could get a lower payment while your employer is still paying you a higher percentage of your salary, which then increases if your employer reduces how much it will pay you.
Will income protection affect my state benefits?
The UK's benefits system is designed to support people who cannot work through illness or disability, are looking for work, or have a low income. And it is changing radically at the moment, as the UK looks to consolidate multiple different benefits into a single system called Universal Credit. If you have an income protection policy and are looking to claim Universal Credit, this will affect the amount of level of state benefits you'll get. Income protection is treated as 'unearned income'. This is taken into account when calculating how much Universal Credit payments you receive. For every £1 of income you receive in unearned income, your maximum Universal Credit payment will be reduced by £1. If you think this might apply to you, read our guide to how Universal Credit is calculated.
What is accident, sickness and unemployment insurance?
Accident, sickness and unemployment policies (ASU) are a cheaper alternative, named because - depending on your choice - you can buy policies to cover you in the event of accident, sickness or unemployment. Like short-term income protection policies, they'll typically provide cover for around one to two years. The main difference with ASU policies is they're sold without full medical underwriting - which means you have less certainty that you'll be covered when you put in a claim.
What else does income protection cover?
Income protection policies will come with a whole range of benefits. Not all insurers will offer all of these features, but these are some you may encounter.
