Income protection insurance - Which? (2024)

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We explain income protection insurance and whether it is right for you. Find outall you need to know in our complete guide.


Dean SobersSenior researcher & writer

Income protection insurance - Which? (1)

In this article

  • What is income protection insurance and how does it work?
  • Do you need income protection insurance?
  • How much does income protection insurance cost?
  • When and how does income protection pay out?
  • What else does income protection cover?
  • What is accident, sickness and unemployment insurance?
  • Income protection FAQs

What is income protection insurance and how does it work?

Income protection insurance is a policy that pays out if you're unable to work because of injury or illness. It works by paying out regularly to replace a portion of your income.

Formerly known as permanent health insurance, it's there to help you pay your household bills, mortgage payments, credit card bills and everyday costs that you can no longer cover, by making sure you have a regular income over the long term.

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.

It's not the same thing as critical illness insurance, which pays out a single lump sum in the event of a serious illness, or mortgage payment protection insurance, which specifically ensures your mortgage payments will be met.

Depending on the policy, it can provide between 50-70% of your income. There can be a gap - the 'deferral period' - before you receive the first payment, depending on the policy and premiums.

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Income protection insurance - Which? (2)

Do you need income protection insurance?

Unfortunately, only a few employers support their staff for long periods if they're off sick from work. Some employers can provide as much a year on full pay; other employers will provide six months on full pay and then a period on half pay before reducing sick pay to the statutory minimum.

Many employers provide significantly less time off on full pay - your employment contract will tell you where you stand.

If you are approaching retirement, or have substantial savings, or have an employment contract that gives you sufficient sick pay then potentially you might not need it.

For most people though, given the low level of state benefits available, and the lack of statutory sick pay for anyone who is self-employed, those of working age should consider some form of income protection if they can afford it.

Neither income protection nor short-term income protection pay out if you're made redundant. But they will often provide 'back to work' help if you're off sick. Note that income protection insurance is different from life insurance, which pays out if you die. Read more about the best life insurance in the UK.

How much does income protection insurance cost?

Your age, your health, whether you smoke and percentage of income you'd like to cover, will affect 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.

Other factors include whether you are paying a standard or a guaranteed premium. The former means the insurer can increase it over time, while the latter stays fixed for the duration of the policy.

When and how does income protection pay out?

How much you'll receive

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.

  • 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 to replace your annual income.

The good news is that payments from income protection policies are tax free.

How long it pays out for

Income protection insurance will pay out for as long as you remain ill and unable to work, until you die or until the policy term comes to an end, whichever is sooner. If you make a good recovery, income replacement insurance will often provide help in returning to work too.

Find out more and get advice on income protection using the service provided by LifeSearch. Discover more.

When you'll receive it

Income protection policies pay out only once a pre-agreed period has passed, generally ranging from one to 12 months after you were taken ill. 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 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:

How you would claim

You will have to meet exactly the criteria laid down by the policy and specifically the definition of the occupation covered and your ability to do alternative work, if that applies.

There are three methods insurers use: activities of daily living, suited occupation, and own occupation.

1. Own occupation

Thesepolicies pay out if you can't do the job you currently hold at the point of making a claim. An insurer will not make an assessment that you could take a different, similar job, and therefore refuse to pay, like a 'suited occupation' policy (see below).

This type of income protection provides the highest level of protection should you get ill and be unable to do your job, but are also the most expensive.

2. Suited occupation

If an income protection policy is bought on a 'suited' basis, this means that your insurer accepts you can't do your job anymore, but may not pay out when you make a claim if it believes you can do something similar to which you are suited. For example, you may have a senior role managing a team of people, which you can no longer do because of stress.

With a suited policy, the insurer might deem that you go down a level, where you're doing a similar role but no longer managing a team, and therefore refuse to pay out.

A suited policy is better than one that uses activities of daily living to assess your ability to work (see below), but the type that offers the best protection is the own occupation policy.

3. Activities of daily living

Some older income protection policies use a method called 'activities of daily living' - otherwise known as 'work tasks'.

These tasks are generally very basic - for example showering, getting dressed, using the toilet, brushing your teeth, or walking, climbing stairs and getting in and out of a car. If you were unable to do, for example, three of these things, the policy will pay out.

These types of policies tend to be cheaper but aren't recommended. You might be so ill that you cannot work, but can still walk, lift and write, and an insurer may turn down your claim, arguing that you could do some type of job.

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.

  • Payouts for hospitalisation: some policies pay you a proportion of your income protection if you go into hospital, even if this is before your deferral period is over.
  • Waiver of premiums: this means you won't have to pay premiums while you are claiming on your income protection policy.
  • Life insurance: most income protection policies come with life insurance, usually equivalent to a year or two years' worth of monthly premiums.
  • Payments on return to work: many income protection policies don't stop paying when you go back to work. If your earnings are reduced because of your illness (perhaps because you are working fewer days), your income protection will continue paying out, albeit at a reduced rate in line with your reduced earnings. This will end once your earnings recover to the level when you took the policy out.
  • No deferral if you get ill again: if you've made a claim once and you get ill or incapacitated again within 12 months, many insurers will waive the deferral period, meaning you don't have to wait to get a payout.

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.

  • Find out more: Accidental death insurance explained

Income protection FAQs

Inflation is an important thing to consider when taking out an income protection policy.

When you're 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 the 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.

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.

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.

If you have an income protection policy and are looking to claim universal credit, this will affect the 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.

Search the UK's leading insurers using the service provided by LifeSearch.

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  • Best life insurance

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Search the UK's leading insurers using the service provided by LifeSearch.

Get advice now

More on this

  • What is life insurance and how does it work?
  • Whole-of-life insurance explained
  • Term life insurance explained
  • Best life insurance

Related articles

  • Over 50s life insurance explained: is it worth getting?
  • Do I need life insurance for a mortgage?
  • Joint vs single life insurance
  • Can you have more than one life insurance policy?

I am Dean Sobers, a senior researcher and writer with expertise in various financial topics, including insurance. My in-depth knowledge in the field allows me to provide valuable insights and information. Now, let's delve into the concepts used in the article about income protection insurance.

Income Protection Insurance Overview: Income protection insurance is a policy designed to pay out if an individual is unable to work due to injury or illness. It ensures a regular income replacement to cover household bills, mortgage payments, credit card bills, and everyday costs during the period of incapacity. Formerly known as permanent health insurance, it typically pays out until retirement, death, or the return to work.

Distinguishing Factors:

  • It differs from critical illness insurance, which provides a lump sum in the event of a serious illness.
  • It is distinct from mortgage payment protection insurance, which specifically covers mortgage payments.

Coverage and Duration:

  • Income protection policies usually provide 50-70% of the individual's income.
  • The coverage duration extends until retirement, death, or return to work.
  • Short-term income protection policies, lasting one or two years, are available at a lower cost.

Factors Influencing Cost:

  • Premiums are influenced by age, health, smoking habits, percentage of income to cover, and job type.
  • Jobs are categorized based on risk levels, affecting premium amounts.

Payout Details:

  • Payouts are based on a percentage of earnings (50-70%).
  • Payouts continue as long as the individual remains unable to work, until death or the policy term ends.

Deferral Period and Claim Criteria:

  • A deferral period exists before receiving the first payment, influencing premiums.
  • Claim criteria include methods such as own occupation, suited occupation, and activities of daily living.

Other Features of Income Protection Policies:

  • Some policies offer payouts for hospitalization.
  • Waiver of premiums during the claiming period.
  • Inclusion of life insurance equivalent to a year or two of monthly premiums.
  • Payments continue upon return to work, adjusting to reduced earnings.

Accident, Sickness, and Unemployment Insurance:

  • ASU policies are a cheaper alternative covering accident, sickness, or unemployment for one to two years.
  • Sold without full medical underwriting, providing less certainty for coverage.

Income Protection FAQs:

  • Inflation consideration: Adding an 'index-link' to the policy to adjust with inflation.
  • Stepped income protection: Allows different payment levels based on employer's changing sick pay.
  • Interaction with the UK's benefits system, affecting universal credit payments.

Conclusion: Income protection insurance serves as a crucial financial safety net, offering coverage for individuals facing income loss due to illness or injury. Understanding the various aspects, including coverage details, premium factors, and additional features, is essential in making informed decisions about selecting the right policy. If you have further questions or need advice on income protection, feel free to reach out.

Income protection insurance - Which? (2024)


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