What Is Income Protection & Should I Take Out a Policy? Get the Full Facts

Ian Lewis[1]

Ian Lewis

Money Savings Advice income Protection guide

Most workers rely on the money they earn to pay for household essentials. Your salary pays the bills, pays for food, and keeps a roof over your head. If your income suddenly disappeared, would you be able to survive?

Income protection can help if you’re unable to work long-term. If statutory sick pay wouldn’t be enough, income protection can step in.

What Is Income Protection?

Income protection is a type of insurance designed to pick up the slack when statutory sick pay doesn’t cover all the household bills. If you’re injured or ill for more than a few weeks, you can use your insurance to access regular payments. With income protection, you don’t need to drain your savings accounts.

Income protection can replace your wages whilst you’re unable to work. It could cover your costs for several months or might even payout until you choose to retire or your policy ends. The exact terms of your payments will depend on your specific policy. In most cases, your insurance only starts paying out once statutory sick pay stops.

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What Is the Meaning of Income Protection

Income protection is usually defined as a long-term insurance policy. It will pay out for as long as you need it whilst the policy is running.

Standard income protection isn’t the same as short-term income protection. The latter will usually only payout for up to five years in total, whilst the former will continue to pay what you need until retirement, death, or the end of the policy.

Who Can Take Out Income Protection Insurance Policy?

Almost anyone over the age of 18 can take out income protection insurance.

You won’t need income protection if you’re sure that you have enough savings to live on, assuming that you’re happy to use your savings to pay the household bills. If you can comfortably survive on government benefits or sick pay provided by your employer, you may not need income protection. 

You might also not need it if you’re in a position to take early retirement if you need to, or if you can cope without income because your partner will be able to support you. If none of these apply to you, and if you think you’d need another source of income if you were unable to work, then you’ll want to look into income protection insurance.

Who Should Definitely Take Out Income Protection?

You should definitely take out income protection if you’re in a vulnerable industry or if you do a job where your income depends on you being in peak physical health.

If you’re self-employed, income protection is especially important. Self-employed people don’t get sick pay from employers, so their income disappears almost instantly if they can’t work.

Which Industries Make You Most Vulnerable?

If you work in the health and fitness industry, perhaps as a personal trainer, then you’ll struggle to work if you’re ill or injured and could lose your only source of income.

Most of the most hazardous jobs – most likely to lead to injury that causes a reliance on income protection – are also the riskiest and result in the highest monthly premiums. You may need income protection if you work with machinery, if you’re an electrician, or do a job with lots of driving.

People that work in the media should also have income protection. Whether you’re behind the camera or a star of stage or screen, your job relies on you being in good health, and your income could vanish overnight. Some policies also include redundancy cover, which may be very important if you’re in any career in which redundancies are more common.

It’s important to remember that nobody’s job is ever completely secure. Even if you’re in a very stable industry and don’t consider your job to make you vulnerable, injury and illness can affect anyone and might take you by surprise. We can all be affected by medical concerns that leave us unable to work, so feeling overly safe can stop you from paying for insurance that you might one day need.

Who Can’t Take Out Income Protection Insurance?

In order to take out income protection, you’ll need to be a permanent UK resident. Luckily, there are very few other things that will stop you from getting insurance. Most of the exclusions you’ll need to watch out for will affect you when it’s time to claim, so you might be offered income protection but find that you’re unable to use it. It’s very important to check terms and conditions to see what might stop you from claiming. Make sure that you find a policy that is likely to cover you.

What Exclusions Are in Place for Income Protection?

Insurers will have their lists of exclusions. Most will not cover illness or injury related to alcohol or drug use, and you might also be asked to accept the exclusion of any pre-existing condition. Make sure you read the policy terms carefully to check when your claim might be refused.

You might not be able to get a payout for a mental health condition. Often insurers cover physical illness, but not things like stress or depression. Some do, so it’s worth shopping around to get the best insurance plan depending on what you’re concerned could affect you.

How Much Does It Cost To Take Out Income Protection Insurance?

The cost of income protection insurance can vary from person to person. Your insurance premiums will be influenced by the level of risk you represent. Insurers need to make their money from people who pay for income protection but never need to claim it. If you’re in a risky job or have other risk factors, insurers will want to charge you more.

Income protection insurance prices will also depend on your payouts. If you need a relatively small monthly income, your premiums will be lower than if you’d need a large salary replaced.

Your Income Protection Insurance Could Cost As Little as £10 per Month, for a Small and Basic Policy.

Most people pay somewhere between £50 and £80, but you’ll pay more if you’re in an industry where there’s a higher chance that you’ll need to claim, or if you’ll need a higher amount of monthly payout if you did need to claim on your insurance.

What Is the Most You Can Insure Against?

Most insurers set a percentage-based limit. They’ll typically allow you to claim up to 50-70% of your gross earnings. This means that income protection doesn’t completely replace your wage or salary but should give you the money you need to cover all your essential bills at least. 

In short, it’ll help you keep your head above water and stop you from completely running out of money. However, you might need to tighten your budget. If you’re concerned, then try to build up some personal savings alongside making your insurance payments. That way you can make sure you’ve enough for everything you need during the time between working. Different insurers have different payout limits, so check before you take out your insurance.

Do You Pay Monthly for Income Protection Insurance?

You’ll pay monthly for your income protection insurance. Your monthly premiums must be paid on time to keep your insurance fully active. If you fail to make a payment on time, then you could declare your policy void and lose the right to claim. You’re not locked into a long-term contract, so as soon as you stop paying, you stop being covered by your income protection insurance.

As long as you keep paying your monthly premiums, your policy should stay active. Yours may last for a certain length of time, so be sure to check your terms and conditions to see if there’s an end date for your policy. Most are without a fixed term, but shorter-term policies of around five years also exist.

When Does an Income Protection Insurance Payout?

Income protection typically comes with what’s called a ‘deferred period.’ This is the time between losing your income and being able to claim. Some insurers won’t start paying out until you’ve lost income from a month. Other insurers will make you wait longer, and up to three months is relatively standard.

It’s not uncommon for income protection to take 28 weeks to payout. This is how long you’ll be covered by statutory sick pay. Some insurers wait until SSP stops before they start replacing your income. Check the terms of your policy document to see exactly how long you’ll be waiting.

As you may be unable to work for several months before you can claim on your insurance policy, it’s sensible also to have savings set aside to cover your bills in emergencies. It would be best if you didn’t rely on income protection being there as soon as you need it, as you may need to cover your expenses in advance.

How Long Does It Take To Receive the First Income Protection Insurance Payout?

Once you’ve become ill and you’re unable to work, you should send proof to your insurer. Then, you’ll wait until your deferred period has passed. You could be waiting about four weeks for your first insurance payout, but some providers will ask that you wait for at least two years for your first payout.

Each insurer has different limits and deferred periods in place. Make sure you know how long you’ll be waiting before you take out income protection. If you think you’ll struggle to have any savings built up in case of needing to claim, then look for a policy with a shorter deferred period. In the mean time, you’ll be able to look into claiming any benefits that you’re entitled to while out of work to support you.

What Do I Need To Show To Claim My Income Protection To Prove That I’ve Lost My Job?

If you’re unable to work, you should start your claim with your provider as soon as you can. You’ll need to gather some paperwork and evidence so that your insurer can payout.

Your insurer will expect to see some evidence to show why you’re unable to work. This might be a medical report or a letter that’s signed by your GP. Most will also ask to see your ID, like your birth certificate.

If you’ve been made redundant, you’ll need to show evidence of the communications which cover your redundancy decision. These will need to be dated because you need to show you’ve had your insurance policy for a set amount of time before your redundancy kicks in. Your insurance will be void if you took it out after redundancy consultations started, and some insurers may void it if you’re made redundant within a set time of taking out the policy, in case you can tell it’s imminent.

You’ll be given forms to fill in, and you’ll need to send these back to your insurer. You’ll also be expected to provide proof of income, so your insurer can see how much you should be earning and can calculate your monthly payouts.

If you declared higher income when you first took out your policy, this doesn’t mean that your insurance isn’t valid if you’re now earning less. As your payouts are based on a percentage calculation, if your income has dropped, then you’ll be given a smaller payout each month. If you were underinsured and have actually been earning more than your premiums reflect, your insurer is likely to offer less than 50% of your income.

What Happens if I Have No Proof That I’ve Lost My Job for My Income Protection Insurance Claim?

If you’re unable to work, there will need to be a very good reason. Insurers want proof that an injury or illness has led to you losing your income. If you don’t already have proof, contact your insurer and find out what proof they’ll accept. You may need to get a letter from your GP or schedule a medical assessment.

Can You Take Out Income Protection if You Know You’re Being Made Redundant?

If you already know that you’re being made redundant, don’t take out income protection. Any policy would be null and void if you were already facing redundancy. Your redundancy process will include dated letters of notification, which your insurer will ask for copies of, so they’ll be able to work out that you’d only taken out the policy once the redundancy process had begun.

If you take voluntary redundancy, this also stops you from making a claim on your income protection insurance, even if you’ve had your insurance for a long time. Your insurance won’t payout if you’ve chosen to lose your job.

Can You Take Out Income Protection if You’re Self-Employed?

You can, and should, take out income protection if you’re a self-employed person. Being self-employed often means that you’re completely reliant on your health, so any injury or illness could instantly stop you from earning anything at all.

Self-employed people can’t even depend on sick pay benefits from an employer, so their income can dry up straight away if they’re suddenly unable to work. Remember, though, that you’ll still have a deferred period to contend with, so don’t expect to be able to claim insurance from the moment your work ends. Again, try to build up some savings to help with essential bills.

Check your chosen policy carefully. Many insurers will not provide income protection for self-employed people, so you’ll need to find an appropriate insurer that’s happy to offer this cover.

There are plenty of suitable insurers out there, but it’s vital that you do your research. If you choose the wrong insurer, they may not pay out if you find yourself unable to work.

Can You Take Out Income Protection if You’re a Sole Trader?

If you’re a sole trader, look around for self-employed income protection. This will provide you with a monthly income if you’re unable to work.

In order to access insurance payouts, you will need to provide proof of income. A sole trader’s income can fluctuate and change, so insurers will typically take an average of your earnings over the last 12 months.

Being a sole trader means you’re really at risk if you find yourself unable to work, as there’s nobody else to keep the business going, and your income might disappear completely. You’re unlikely to have access to sick pay, so it’s imperative that you find a policy that’s designed to meet your needs quickly.

As a sole trader, your business might depend on you entirely. Your business might be made of your skills, rather than any particular product, so you’ll want good insurance for financial protection if you can’t keep doing what you do.

Can You Take Out Income Protection if You’re a Company Director?

If you’re a company director, you might want to look at a different type of income protection. You may benefit from signing up for director’s income protection or executive income protection, with premiums being paid by your company rather than your personal account.

Though you can take out personal protection insurance, attaching a policy to your business can help you save money long-term. Your premiums are classed as a benefit in kind, which means that they’ll be tax-free.

If you choose to pay for personal protection insurance, any payouts are free from tax and National Insurance. If you need to claim, those payouts are made directly to your bank account. If you want the tax-free benefits of paying premiums through your company, any payouts at a later date will be made to your company as well. If you use this money to pay yourself a salary, it will be subject to tax and National Insurance.

Being a company director means that you have a choice. There are pros and cons to each type of income protection insurance you can get, so you’ll need to make a smart financial decision to get the best from your insurance.

Can You Take Out Income Protection if You’re Registered Self-Employed?

Anyone that’s registered self-employed should have income protection in place unless they know that they have enough savings to see them through until they reach retirement. If an injury left you permanently disabled and unable to keep doing your job, you would want some income protection to make sure that your bills can be paid.

If you’re self-employed, you’ll need to pay for personal income protection. The money will come out of your own bank account, and any future payouts will be free from tax and National Insurance.

Can I Have More Than One Income Protection Policy?

There’s nothing to stop you from taking out more than one income protection plan, though this is usually an unwise decision that will mean you’ll be losing out financially.

Since most insurers will only pay out up to 70% of your income, it’s tempting to think that having multiple policies will mean your whole salary is covered. In fact, you can’t have one policy covering 70% of your income whilst simultaneously claiming from another to top up to 100%. Insurers set their maximum limits not just for their own insurance policies but applied to all the policies you have, so that limit applies overall.

If you need to make a claim on your income protection, you’ll be asked about policies elsewhere. Any income protection from another provider will be factored into what you receive so that insurers will offer a smaller percentage of your wage or salary each month. No matter how many policies you have, you’ll still only receive a maximum percentage of your original income.

So, why pay for two different insurance policies? Other insurers have additional terms and conditions applied to their policies, so where one might refuse your insurance claim, another might agree to payout. Having two policies can help you hedge your bets, so you don’t have all your eggs in one basket, but you’ll need to be careful.

If you’re going to have more than one insurance policy, don’t take out the maximum level of cover with either provider. Instead of paying for 70% coverage with each different provider, pay for 35% and keep your monthly premiums down. You then have two chances to get 35% of your income covered if you can’t work, and if both of your insurers agree to payout, then you’ll get 70% paid each month.

Money Savings Advice Tip

Long gone are jobs for life so it's never been more important to plan for the worst. In most cases income protection insurance costs are minimal but can be financially life-saving should the worst happen to your job. It's better to plan for the worst before the worst happens and income protection insurance certainly offers that protection, especially if you have a mortgage and family to support.

Does Income Protection Payout if I Die?

Income protection insurance does exactly what it says on the tin. It’s a form of health insurance to replace your income whilst you’re unable to work. It’s personal to you and you alone.

If you die, you wouldn’t be working at all. Your income protection doesn’t payout upon death because your dependents aren’t named as beneficiaries. For this kind of payout, you’ll need a life insurance policy.

It’s possible to have both income protection and life insurance at the same time and is often recommended. That way, you’re personally protected if you can no longer work, and if you die then, your loved ones aren’t suddenly left without your income. If you want financial protection for every situation, take out two separate policies.

Does Income Protection Affect My Redundancy?

If your income protection covers redundancy (and not all policies do), then you’ll receive income protection as well as your redundancy payment. No policy, even with redundancy protection, will pay out if you take voluntary redundancy.

In order to keep claiming your monthly payments, you may need to show that you’re actively looking for work. You can’t use redundancy protection to stay unemployed indefinitely, and payments will only be made until you’ve found somewhere new to work.

Does Income Protection Affect State Benefits?

If you claim on your income protection insurance, state benefits may be affected. State benefits are there to provide support if you’re unable to work, but your income protection payments will be classed as unearned income for calculation purposes.

Your entitlement to benefits like Universal Credit will be affected by your payments, so for every £1 of unearned income, your Universal Credit drops by £1.

Will I Lose My State Benefits if I Have Income Protection Insurance?

You won’t lose your state benefits, though some means-tested benefits may be affected by your income protection insurance. If you’re getting monthly insurance payouts, these will reduce the amount of Universal Credit that you are entitled to.

Since your income protection will never cover 100% of your old wages, it’s improbable that you’ll see a reduction to Universal Credit and state benefits that you were already claiming whilst working. If anything, you may be entitled to more money if your income has dropped.

How Can Money Savings Advice Help You With an Income Protection Insurance?

Here at Money Savings Advice, we have partnered with some of the UK’s leading Income Protection Insurance brokers. They have already helped thousands of people get the best Income Protection Insurance cover and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.


Money Savings Advice Author Ian Lewis

Ian Lewis

Ian Lewis is one of our specialist financial writers. Ian has over 15 years of financial writing experience, having worked for some of the largest financial publications in the UK covering topics from mortgages, equity release, loans and financial claims, to name a few.

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