Income protection: How it works and why it matters

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Income protection can safeguard your financial stability if you're unable to work. In this blog we’ll explore what it is and why it’s so important.

What is income protection insurance?

Income protection – formerly known as permanent health insurance – is a type of insurance cover that pays you a regular income if you can't work due to sickness, disability or if you have an accident. This typically continues until you either return to paid work, retire or pass away, or until the policy term ends – whichever is soonest.

Policies have their own specific terms and conditions.

How does it work and when does it pay out?

Income protection insurance is designed to help you with your household bills, mortgage repayments, credit card bills and other everyday outgoings that you’re no longer in a position to pay if you can’t work, by ensuring you have a long-term regular income. There are other affordable short-term policies also available.

This type of policy pays a percentage of your normal income – usually around 50-70%. These payments are tax-free.

There is often a ‘deferral period’ – a stage between not being capable of working and your first sum. This can vary according to the policy.

Income protection should not be confused with critical illness cover. This is where you receive a single lump sum if you are diagnosed with a serious illness.

Who should consider income protection?

You may want to think about income protection if:

  • you’re self-employed
  • you’re employed but your employer only provides limited sickness benefits
  • you don’t have sufficient savings
  • you have dependants or people who rely on your income
  • you’re single with responsibility for all household expenses
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Getting the most suitable policy for your circumstances can be tricky to work out, as there is much to consider.

How much cover do you need?

This very much depends on your individual circumstances.

Generally speaking, the higher the monthly benefit and the longer the potential claim period, the more expensive the premium.

When considering the percentage of income to replace, it’s your fixed living expenses you’ll need to take into account, along with what, if any, other income sources you have.

You are able to have multiple income protection policies running at the same time, to manage the long and short-term financial impact of a disability.

Choosing the most suitable income protection policy

Getting the most suitable policy for your circumstances can be tricky to work out, as there is much to consider. A financial adviser can help you make an informed decision.

Once you have considered how much of your income you want to cover, work out the level of cover. There are several:

  • Own occupation. For if you can’t do your current job when making a claim.
  • Suited occupation. For if you can’t do your current job or a similar one.
  • Any occupation. For if you can’t work at all.

If you have any pre-existing medical conditions, some insurers may not cover you for these or charge you higher premiums.

Income protection can be crucial but choosing the policy that’s most suitable for you can feel daunting as it’s quite complex. An experienced financial adviser can help you work out your options.