What is income protection insurance?

What is it?

Income protection is a type of insurance that pays you an income if you have to stop working, due to illness or injury for example. When you apply for a policy, you need to think about:

• The payout: This is the income you will get paid if you claim

• The term: This is the length of your policy

• The premium: This is how much you pay each month to keep the policy running

Depending on the policy you choose, income protection could cover you against:

• Accidents, e.g. if you are injured in a car accident and cannot return to work

• Sickness, e.g. if you get diagnosed with a serious illness and cannot work

• Unemployment, e.g. if you become redundant, not when you quit your job

Compare income protection policies here

How does it work?

When you apply for income protection, you can usually choose either:

• Level cover: Your payout and premiums are fixed for the term of the policy

• Inflation linked cover: Your payout and premiums go up each year in line with inflation

There are also two types of insurance premium you could pay, depending on the insurer

• Guaranteed premiums: You pay a fixed premium for the policy's term. However, if you have inflation linked cover, your premium and payout will be guaranteed to increase each year until the policy ends.

• Reviewable premiums: You have fixed premiums for a set term, such as 15 years, then you can review your policy and adjust the income payout. If you review your cover, it could affect your premiums.

Who can get it?

You can apply for income protection if:

• You work in full time employment

• You work in part time employment

• You are self employed

You can still apply if you have a pre-existing medical condition, but insurers may charge you more, or exclude any claims related to your condition.

Do you need it?

If you can afford to replace your income if you were out of work, you may not need it, but if you cannot then you should consider getting an income protection policy.

What cover do you need?

To decide what cover you need, think about:

• How long you want a policy to pay you an income for

• The percentage of your income you want covered

How much cover do you need?

Most insurers let you specify an amount or choose a percentage of your existing annual income, for example 65% of your yearly salary.

Most insurers have an upper limit on the amount you can cover, for example, up to 65% of your income or £40,000, whichever is higher.

To help you decide how much income protection to choose, write a budget to work out which outgoings you need to cover.

What term should you choose?

There are two types of policy terms:

• Short term: You only get an income paid to you for a set term, such as 6 or 12 months.

• Long term: You get an income paid to you for as long as the policy allows, usually up to your retirement age or a set term like 40 years.

Short term policies are usually cheaper than long term policies because the insurer will only ever need to pay out an income for a limited time.

However, if you were off work for a longer period of time, a short term policy would not cover your income when you really need it.

What is a deferred period?

It is the time between making a claim and when you start getting an income paid to you. You can choose to have a deferred period of 6 or 12 months, sometimes longer.

The longer the deferred period you choose, the cheaper your premiums are likely to be.

Ask your employer how long they will pay you if you could not work due to illness or injury. If you get six months full pay, for example, you could choose a 6 month deferred period.

This would mean:

• You continue to get an income if you cannot return to work after 6 months

• Your premiums are likely to be cheaper than a policy that pays out straightaway

How much does it cost?

An insurer will base the cost of your monthly premiums on several factors:

• Age: The younger you are, the cheaper your policy will be monthly. You can apply from 18 years old, with most insurers letting you apply up to the age of 60.

• Health: You complete a medical questionnaire when you apply, and confirm if you smoke or have ever smoked. The healthier you are, the cheaper your premiums.

• Income needed: This could either be up to a set amount or a percentage of your annual income. The higher the amount, the more expensive your premiums will be.

• Length of cover: The shorter the term you choose, the cheaper it will be. This is because the insurer has a shorter window of time when they could pay out.

• Deferred period: You can reduce your monthly premiums by choosing a deferred period. Most insurers let you defer your payout by 6 or 12 months.

You can compare income protection policies here

When does it pay out?

When you set up your policy you can choose to have your income paid out:

• Straight after claiming: You get an income paid as soon as you are unable to work. This is usually the most expensive option.

• After a set term: Wait a fixed period after claiming for your payout to start, e.g. 6 months. This could suit you if your employer pays you for the first 6 months off work.

Most income protection policies limit how long you can get an income for, such as up to the age of 70.

If you only want an income paid out for a fixed period, like 12 months, you could choose a short term income protection (STIP) policy instead as a cheaper alternative.

Here is how to claim on an income protection policy