Income protection insurance

Worried about losing your income and want to know how you can protect it? Compare income protection insurance policies and find the best one for you.

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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.

Example: Income protection

If your company is impacted by an event beyond your control (such as the coronavirus pandemic) and you are made redundant as part of cuts to the company's expenses, income protection will kick in and pay you a monthly percentage of your old salary to help with household bills and expenses.

Even if you receive a redundancy package from your employer, income protection can top this up and give you more breathing space while you look for another job.

* This is a fictional, but realistic, example.

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

More guides on Finder

  • Accident and sickness insurance

    Learn what accident and sickness insurance means, what it includes and whether it’s worth taking out.

  • Unemployment insurance

    Find out how you can protect yourself financially in the event you lose your job with unemployment insurance.

  • Redundancy insurance

    In the event of being made redundant, insurance can provide financial protection. Find out what’s included in redundancy insurance.

  • Loan protection insurance

    If you find yourself unable to work, a loan protection insurance policy will pay out monthly benefits straight to your bank account.

  • Payment protection insurance

    Despite its questionable past, PPI can help protect you financially if you lose your income and are unable to make repayments on loans.

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