ASU vs income protection insurance

Protecting your income is essential if you are unable to work for a substantial period of time. With a majority of your income covered, some of the pressure to cover essential outgoings is relieved, which allows you to focus on getting back to work.  

How does ASU insurance work?

Accident, sickness and unemployment insurance (ASU) pays out if you lose your job or become unable to work through illness, injury or redundancy.

It's often referred to as short-term income protection insurance or payment protection insurance, as payouts are restricted. Typically, you can only make one claim per policy, and the policy will only pay you for 12 months.

Cover levels are based on your income, and will usually pay between 50% and 65% of your earnings. The payouts are intended to help cover essential outgoings, such as rent or mortgage, although you probably won’t be asked about these when applying.  

If this sounds a little too low, don’t forget that if you’re employed your employer must pay you statutory sick pay – whether or not you have any form of income protection. See below for more on statutory sick pay.

You’ll pay a monthly premium for the cover, which rolls over month by month until you cancel the policy, fail to make the monthly payments, or make a claim. This makes ASU insurance relatively informal and easy to take out. But it still makes sense to compare policies, for the amount they will cover, and how much this will cost you each month.

Also, remember that you’ll stop receiving your tax-free monthly payments when your term ends, even if you are unable to return to work. 

Income protection insurance

Income protection gives you longer term cover if you're unable to work for health reasons.

Similar to ASU, income replacement policies are based on your current earnings and pay up to 65% to 70% of that sum, but they don't usually cover redundancy.

The major difference is that income protection will pay out until you can return to your job, find another job or even retire. There is no time limit on how long a period this could be, although the insurer is entitled to ask for proof that you are still unable to work.

Some policies only pay if you can't perform any work, rather than simply being unable to remain in your existing role. More comprehensive policies protect your existing job, but they cost more.

Income protection tends to include detailed personal questions and a medical. You’ll pay more if you smoke, and pre-existing medical conditions may be excluded, or result in higher premium payments. 

This type of cover is significantly more expensive than the shorter-term ASU as it’s more comprehensive and comes with far more flexible payout terms. Even so, always shop around for the best and most cost-effective income protection policies, as some are better, and cheaper, than others.

What factors affect how much income protection or ASU costs?

Premiums are based on several factors, typically:

• Your age. The older you are the more likely you are to fall foul of illness and make a claim.

• The initial exclusion period, which is the time between purchasing the cover and when you can claim on the insurance. The shorter the period the higher the cost

• The excess period, which is the period after you make a claim that you will start receiving payouts. The shorter the period, the more expensive your protection

• The amount you would like to get each month. The lower proportion of your monthly income you are willing to take, the cheaper the policy

What sick pay are you entitled to?

Some employers have a sick pay scheme built into their employment contracts, also known as a company or occupational scheme. Even if they don't, employers are required by law to give you Statutory Sick Pay (SSP) provided:

• You are classed as an employee (including agency workers)

• You have been ill for at least 4 days in a row. You can get SSP for all the days you are off work, bar the first three days

• You or someone you live with has Covid-19, or the symptoms, or you’ve been advised by a healthcare professional to self-isolate ahead of surgery

• You earn an average of £120 per week, before tax

• You tell your employer you're sick within an appropriate time frame

If you meet these criteria, you can start claiming Statutory Sick Pay, currently set at £96.35 per week for up to 28 weeks.

You'll only get paid SSP for the days you would normally have worked, and it’s subject to Tax and National Insurance. You won’t be entitled to SSP if you are self-isolating after entering or returning to the UK and otherwise would not be self-isolating

Note that different rules apply for Agricultural Sick Pay.

Which should you choose?

If you need more financial help than SSP and/or your company scheme can provide, or you are self-employed and wouldn’t have access to employee sick pay, it makes sense to protect yourself with an ASU or income protection policy.

The major difference between these types of policies is why they pay and how, so you'll need to think carefully about:

• Your circumstances

• What you want to be covered for

• How much it's worth spending on premiums

Both types of policies require a deferred "off work" period before they'll make payout, although some policies will backdate their payments to the start of your claim.

If you don't have many outgoings or significant liabilities, ASU should help you stay on your feet by covering your debts and bills, until you can get back into work.

However, longer-term income protection will give you a stronger safety net, albeit for higher monthly payments.

In either case, an unemployment-based insurance scheme is a commitment. If you miss monthly payments you are likely to forfeit the right to claim. This is worth bearing in mind if your employment history and prospects are sketchy.