Income protection insurance provides financial support if you’re unable to work due to illness or injury or if you are made redundant. We’ve looked at what the policy includes, whether it can be taken out for the short or long term and how you can find the best cover for you.

What is income protection insurance?

If you find yourself unable to work due to an accident or illness, or if you lose your job through no fault of your own, income protection insurance pays you an agreed portion of your salary each month.

The money can be used to cover expenses, existing debts, bills and other costs. Income protection can be especially useful for those working in dangerous industries who want to make sure their crucial household expenses, like their mortgage, will always be covered.

Income protection only covers events beyond your control, so you’re much less likely to be covered if you’re fired from your job or if you injure yourself through engaging in risky hobbies or activities (outside of work duties).

What does income protection insurance cover?

Different types of income protection policies cover different aspects (see below), but all provide a monthly payout to help you cover things like household expenses, bills and other outgoings.

What are the different types of income protection?

There are several main types of income protection insurance:

• Accident and sickness. As the name suggests, this type of income protection pays out if you are unable to work as a result of an injury caused by an accident or a serious illness. This cover does not include redundancy.
• Unemployment only. This type of cover pays out only if you’re made involuntarily redundant. If you’re dismissed or leave your job voluntarily, you won’t be covered. Illness and injury are also not included here.
• Accident, sickness and unemployment. The most comprehensive type of cover, this protects you in case you are made redundant (including voluntary redundancy) or if you’re unable to work due to illness or injury.
• Payment protection insurance. Also known as PPI, this cover pays part or all of the repayments on your outstanding loans, normally for up to 2 years.
• Mortgage payment protection insurance. Also known as MPPI, this policy ensures your mortgage is covered if you can’t work, usually for around a year.

There are also options when it comes to your policy’s spec:

• Guaranteed policies. Guaranteed policies mean that your premiums will always stay the same unless you increase your cover.
• Reviewable policies. These policies tend to be cheaper at the beginning, but the premiums are routinely reviewed by the insurer, so they might increase over time.
• Age-related policies. The premiums for age-related policies increase in line with your age, but they are not affected by lifestyle factors or your occupation.

How does income protection work?

Income protection pays out a monthly sum of money, which is a portion of your usual salary. The amount is usually set by you at the beginning of the policy term.

You can choose for payments to start after your sick pay runs out or straight away. The payouts are tax free.

Do you need income protection insurance?

That depends on your circumstances and the benefits you have at your current job.

If you have a large amount of savings to fall back on, you might not need this cover. However, depending on how long you are out of work, you could run out of money at some point.

If your current employer offers a good redundancy package, this can be enough to cover your expenses until you find a new job. And, if your company offers good long-term sick pay, this can also be sufficient.

People who can rely on government benefits or have friends or family to support them may also not need this type of cover.

Income protection can still be useful to top up your income (as it will only cover an agreed portion of your salary, up to 70%), but it does require monthly payments, so it’s up to you to decide if you can rely on other benefits only. If you don’t have these other options, income protection insurance can be a real saving grace.

Short-term vs long-term income protection

Income protection can be a long- or short-term policy.

Long-term unemployment protection usually only covers you if you’re unable to work due to illness or injury. It pays out a portion of your monthly salary until you can work again or until you retire, die or the policy ends.

Short-term income protection can cover illness and injury but also includes involuntary redundancy. This type of policy will only pay out for the limited time set out in the policy documents, usually up to 2 years.

How much is income protection insurance?

The cost of insurance is always reliant on a number of personal factors. For income protection, these include details of both your job and the state of your health.

Things that can affect the cost of your cover include the following:

• Your age
• Your job and salary
• Whether you are or have ever been a smoker
• How much of your income you’d like to cover
• The waiting period before the policy pays out
• The range of illnesses and injuries covered
• Your health, including weight and existing medical conditions
• Your family medical history

The best way to find the best value deal for you is to compare income protection insurance for your personal circumstances.

What other types of insurance should I consider?

There are some types of insurance cover that you can take out instead of, or in addition to, income protection insurance:

• Critical illness cover. If you’re diagnosed with a critical illness and unable to work, this benefit would allow you to claim a lump-sum payment to cover your living expenses.
• Life insurance. Life insurance pays out a lump sum to your beneficiaries if you die. This can help your loved ones pay for your funeral, cover any outstanding debt (including the mortgage) and help pay their living costs.

How can I get the cheapest income protection insurance rates?

There are a few ways to lower your insurance premiums, including the following:

• Choose a longer deferred period. This is the time between you making a claim and receiving an income from the insurer. The longer you make this period, the cheaper your premiums will be.
• Shop around. Work out what level of cover you need then use comparison websites and get quotes directly from companies. This way you can see who really has the cheapest deal out there.
• Choose the right type of policy. Your work might have a group income protection policy in place; if so, you should check if that will give you the cover you need.
• Choose the right level of protection. Work out how much you and your family would need to be covered for should you suddenly stop earning. If you don’t need the maximum level of cover, there’s no need to pay higher premiums for it.
• Stop smoking. While easier said than done, if you can bin the habit, you’ll be considered a non-smoker by insurance companies after 12 months, which will mean cheaper premiums.
• Use an insurance broker. Consider seeking advice from an independent financial adviser or specialist broker. They might charge a fee, but they can help you work out which policy you should get, and help you lower costs.

Bottom line

Even if you have other means of covering your expenses if you lose your job, having income protection in place can be very useful.

This is especially true if you have dependants to provide for or if you’re self-employed (as this means you won’t have sick pay).

To find the best deal for you, compare income protection insurance from different providers.

Frequently asked questions

• Will income protection cover me if I lose my job?

  That depends on how you lose it. If you’re fired or quit, income protection doesn’t usually pay out.

  If you’re made involuntarily redundant, your policy should pay out as long as it includes payment for redundancy.

  Some types of policies also cover voluntary redundancy, but make sure to read your policy details carefully to see if this is included.

• Does income protection cover the self-employed?

  Yes, but you must specify to your insurer that you are self-employed before you take out the policy.

  The terms of your cover might be a little different, but income protection can actually be even more crucial for self-employed people since you won’t be eligible for sick pay if you’re unable to work.

• How long will income protection cover me out of work?

  Long-term protection will cover you until you retire, die or the policy ends. Short-term protection covers you for a specified amount of time, usually up to 2 years.

• Does income protection cover mortgage repayments?

  Yes. If you take out a general policy, it will pay out a monthly portion of your salary for you to spend on whatever you wish.

  Payment protection insurance covers your outstanding loans, which can include your mortgage, and mortgage payment protection insurance covers your mortgage specifically, though it usually only lasts for around a year.

• How long does income protection pay out for?

  This depends on the type of policy you take out.

  Long-term protection will cover you until you retire, die or the policy ends. Short-term protection covers you for a specified amount of time, usually up to 2 years.

  Mortgage payment protection insurance usually pays out for around a year.

• Can I have more than one income protection policy?

  Yes, you can take out different policies to cover different things, like general income protection, plus PPI and MPPI.

  However, note that the benefit amount you receive from your income protection might be reduced, depending on the compensation you get from other policies.

• Can I claim income protection as a business expense?

  Yes, some providers allow contractors or company directors to list their income protection insurance as a business expense.

• Does income protection pay out if I die?

  No. The aim of income protection is to help you support yourself and your family if you’re out of work for a time, even if that’s due to an illness.

  For payment in case you die, you need life insurance.

• Can I cover 100% of my income?

  No. Income protection insurance covers a portion of your income, usually up to 70%. You can set this amount with your insurer when you take out the policy.

• Should I get an inflation-linked policy?

  If you just want to cover your mortgage, then there’s no need to link your income protection insurance policy to inflation.

  You should link it to inflation, though, if you want to maintain your current lifestyle.

• How long does an income protection policy last?

  That depends on the type of policy you choose.

  Long-term unemployment protection pays out until you can work again, or until you retire, die or the policy ends. It usually covers illness or injury only.

  Short-term income protection also includes involuntary redundancy and only pays out for the limited time set out in the policy documents, usually up to 2 years.