Income protection insurance can cover you if injury or illness prohibits you from working. Think of it as a way to protect a regular income until you return to work or retire.
This can help ensure you can pay for food, groceries and bills. You may also have cover for involuntary redundancy. However, long-term income protection insurance may not be able to provide cover for unemployment. Unemployment insurance might be a better option for this.
It can help cover your income if illness or injury prevents you from working
It's a safety net, especially if you have financial dependents
It may not be suitable if you already have a similar employee benefit or are about to retire
Income protection insurance could be particularly useful if:
You're self-employed
You have limited sick pay from your employer
You have multiple financial dependants or have greater commitments
You want to protect your savings
In these instances, having a form of financial protection in place can step in and bridge the gap when necessary.
If you apply for income protection insurance, you'll need to provide personal and financial information to determine what you need from a policy.
You can choose your cover amount. Depending on your insurer, this is typically up to 60-80% of your gross monthly or annual income. You can also choose whether you require a lump sum or regular payments to cover your income. Income protection payments are usually tax-free.
To claim, you'll need to contact your insurer and explain your situation. You may also need to provide evidence, such as a doctor's note, for example. If your claim is successful, your insurer should arrange your payments.
Short-term income protection insurance can help cover your typical income if you suffer an injury, illness or involuntary redundancy. Your claim rests on whether you can't perform elements of your role. These policies are known as 'own occupation'. 'Suited task' policies don't offer as much protection and may not pay out if your employer is able to offer you a different role at work.
Long-term income protection insurance can help cover you until you return to work, retire or until the income protection policy expires. These policies may include a minimum cover period of 5 years. Long-term income protection can cover more serious situations where you may not return for a longer period of time.
Permanent health insurance typically covers a percentage of your income if illness or injury prevents you from working. It’s a long-term insurance and can cover you until you return to work or reach retirement age.
Accident and sickness cover pays out until you can return to work, usually for one or two years.
Unemployment cover pays out a replacement income if you lose your job. Payments are deferred, so this won’t be instant and typically begins after three months.
Accident, sickness and unemployment cover pays out if you suffer illness, an accident, or job loss.
Guaranteed policies come with fixed monthly premiums, so you know exactly what you must pay each month for your income protection cover.
Reviewable policies allow you to change your level of income protection insurance after a set term.
Age-related policy premiums increase as you get older. Your occupation or lifestyle should have no effect on your premium.
When it comes to the cost of income protection insurance, you might think that your monthly or annual salary is a driving factor. However, there are multiple various factors that can determine what you pay, such as:
Your salary: It's a key factor because claim payouts are based on your salary, which in turn can affect how much you pay in premiums.
The type of income protection policy you choose: Guaranteed policies offer fixed premiums, whereas reviewable and age-related income protection policies may change over time. This can affect what you pay.
The length of your deferred period: Generally, if you select a longer deferred period, it can help reduce what you pay in premiums. That said, you'll need to ensure you're financially secure before claim payouts begin.
Your occupation: If your job poses a greater risk in terms of your likelihood of claiming, it may increase what you pay in premiums.
Your level of cover: With income protection insurance, you can usually choose how much of your monthly or annual salary you'd like to cover. As you might expect, choosing a higher percentage of cover increases what you pay.
By assessing your own personal situation against these factors before completing your application, you can help ensure you're getting an accurate amount of cover.
For example, some providers may offer a basic cover amount of 60% of your salary. Let's say you can increase the cover amount to 80% of your salary. Consider whether you can meet all of your financial commitments at a lower percentage. If you can, you may be able to reduce what you pay for income protection insurance as a result.
It’s important that you find the right cover for your needs, so here are three things to consider during the decision-making process:
Yes, you can get income protection insurance if you're self-employed. But, as you'd imagine, the application is slightly different compared to someone working for an employer.
If you're self-employed, your earnings may fluctuate depending on a range of factors. In turn, income protection insurance providers may require you to produce a year's worth of audited accounts during an application.
This is used to work out an average monthly salary that can help calculate your cover amount. If you're self-employed or own a business, you won't usually have cover for unemployment, just accident and sickness.
However, without statutory sick pay, income protection insurance can be a vital financial safety net for those self-employed. This is especially true if illness or injury directly impacts your potential earnings.