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What is income protection insurance, how much does it cost and how long will you get payouts for? We set out what you need to know to protect you, your family and your home.
INCOME PROTECTION INSURANCE IN SUMMARY
Income protection insurance offers a regular income if you’re unable to work due to an accident or illness and will pay out until you return to work, you retire or the policy expires. This can help to cover your essential outgoings like your mortgage and bills to help maintain your lifestyle while you can’t work. Income protection insurance is also known as permanent health insurance.
Yes, it’s a good idea if you or others rely on your income. It can be particularly useful if you’re self-employed or if you are employed but you are only entitled to statutory sick pay (SSP).
But before taking out a policy, you should check:
If you’re not sure whether income protection insurance is right for you, it’s a good idea to talk it over with an expert. Our partners at LifeSearch offer fee free advice on income protection. They will compare quotes from a range of major UK insurers and all quotes given are without obligation.
Only 2 in 10 homeowners have income protection in place, according to Royal London. It’s research found that homeowners are three times more likely to have life insurance than income protection. So this means while many people may have protection in place for their loved ones if they die, they may struggle to cope financially if they can’t work due to illness or injury.
Income protection insurance generally covers most illnesses and injuries that mean you’re unable to work. These include:
However, exactly what’s covered will depend on your policy. And you’ll only get a payout if you meet your provider’s criteria for being unable to work.
Income protection insurance usually pays out until you return to work, you retire, you die or the policy ends, whichever happens first. And you can claim as many times as you need during the policy’s term.
However, if you take out short term income protection (STIP), policies are cheaper but will only pay out for a set period of time, usually between 1 or 2 years.
The cost of income protection insurance in the UK typically ranges from £5 to £50 per month, although the average cost is around £15 a month, according to research by Iaminsured.
But the amount you’ll pay depends on many factors including:
The amount you’ll pay will also depend on your premium type too. These are:
While the cost of income protection varies on different factors, here are a couple of examples of costs:
Example 1. For a 30 year old office worker, who’s healthy and a non-smoker, who wants £1,000 a month cover with a 3 month deferred period, it may cost you £5.89 a month, if you choose guaranteed premiums and a 2 year pay-out per claim. While for a full pay-out term, guaranteed premiums may be around £13.40 per month
– Reviewable age-related premiums with a 2 year pay-out per claim may cost £5.01 a month
– Guaranteed age-related premiums with a 2 year pay-out per claim may cost £5.17 a month
– Guaranteed premiums with a 2 year pay-out per claim may cost £10.17 a month
– Reviewable age-related premiums with a full pay-out may cost £5.01 a month
– Guaranteed age-related premiums with a full pay out may cost £10.76 a month
– Guaranteed premiums with a full pay out may cost £13.41 a month
Example 2. While if the same person is builder, guaranteed premiums for a 2 year pay out may be £7.61 per month, while guaranteed premiums for a full pay out may cost £21.74 per month.
– Reviewable age-related premiums with a 2 year pay-out per claim may cost £7.61 a month
– Guaranteed age-related premiums with a 2 year pay-out per claim may cost £8.12 a month
– Guaranteed premiums with a 2 year pay-out per claim may cost £10.25 a month
– Reviewable age-related premiums with a full pay-out may cost £11.66 a month
– Guaranteed age-related premiums with a full pay out may cost £12.40 a month
– Guaranteed premiums with full pay-out may cost £21.74 a month
Income protection will usually cover up to 70% of your gross salary. The payouts are less than your salary because they’re tax-free. However, the amount you get may be affected if you have other income such as from benefits or other insurance policies.
When you take out your policy you’ll usually have the option to link your payout amount to a measure of inflation like the Retail Price Index (RPI). You’ll usually pay higher premiums if you do this but it means that any payouts will be in line with the increased cost of living in future years.
You’ll need to make five main choices about income protection insurance:
Income protection insurance doesn’t cover you for:
Yes, you can get income protection insurance if you have pre-existing health conditions in most cases. Depending on your circumstances, your insurer may increase premiums or exclude that condition from your policy so that you can’t claim against it in the future. But each insurer is different, so it’s a good idea to speak to an adviser who can explore your options.
Yes. In fact, it can be particularly useful for self-employed people because they don’t get any workplace benefits like sickpay. If you’re a freelancer, contractor or business owner, it’s important to consider how you’d cope financially if you needed to take an extended period of time off work.
Once you know the type of income protection insurance you want, to get a quote you’ll need to provide the following information:
And before taking out an income protection policy you must tell the insurer full details of you and your family’s medical history. If you leave anything out and then try to make a claim further down the line, your insurer may refuse to pay out.
You’ll need to answer all questions fully and tell the insurer if you have any dangerous hobbies or if you’re a heavy drinker. If you don’t tell them about something that affects a later claim, they may not pay out.
Get a quote from your lender or mortgage broker when you take out your mortgage. But make sure you then shop around before deciding on the best policy and price. You can get fee free advice and compare quotes from major UK insurers with our partners at LifeSearch.
Yes. If you can’t work due to illness but income protection insurance means you get a monthly income to support you and your family until you can get back to work, then it’s highly likely you’ll think it’s worth it. For fee free advice and no obligation quotes from major UK insurers, speak to our partners at LifeSearch.
Income protection insurance covers a percentage of your income if you’re unable to work due to illness or injury. Whereas life insurance will pay out to your beneficiaries in the event of your death.
No. Rather than covering your income if you can’t work due to illness, critical illness insurance is designed to pay out a tax-free lump sum if you are diagnosed with one of the illnesses listed on the policy. The conditions covered are very specific and normally include certain types and stages of cancer, strokes and heart attacks, but each policy is different. It may be sold alongside life insurance or separately.
Yes, you can but it won’t mean you get a higher percentage of your salary covered. So if you have two policies that each cover 50% of your income, your payout will still only be 50%.
Yes, you do need to tell your income protection provider if you change jobs. For example, if your new role is considered to be riskier your premiums may increase.
Your cover won’t automatically increase if your salary increases. You’ll need to contact your provider if you want to increase the cover level. If you do increase your cover, your premiums will be more expensive.
No, mortgage protection insurance doesn’t pay out if you die. If you want cover for this, you’ll need to take out a life insurance policy.
When you take out income protection insurance and successfully make a claim, you’ll receive a monthly income from the policy. It’s up to you how you spend this but if you have a mortgage you could use some of the money to cover your repayments.
HomeOwners Alliance Ltd is registered in England, company number 07861605. Information provided on HomeOwners Alliance is not intended as a recommendation or financial advice.
Mortgage service provided by London & Country Mortgages (L&C), Unit 26 (2.06), Newark Works, 2 Foundry Lane, Bath BA2 3GZ, authorised and regulated by the Financial Conduct Authority (FRN: 143002). The FCA does not regulate most Buy to Let mortgages. Your home or property may be repossessed if you do not keep up repayments on your mortgage.
HomeOwners Alliance Ltd is an Introducer Appointed Representative (IAR) of Seopa Ltd, for home insurance, authorised and regulated by the Financial Conduct Authority (FCA FRN: 313860).
HomeOwners Alliance Ltd is an Introducer Appointed Representative (IAR) of LifeSearch Limited, an Appointed Representative of LifeSearch Partners Ltd, authorised and regulated by the Financial Conduct Authority. (FRN: 656479).
Independent Financial Adviser service is provided by Unbiased, who match you to a fully regulated, independent financial adviser, with no charge to you for the referral.
Bridging Loan and specialist lending service provided by Chartwell Funding Limited, registered office 5 Badminton Court, Station Road, Yate, Bristol, BS37 5HZ, authorised and regulated by the Financial Conduct Authority (FRN: 458223). Your property may be repossessed if you do not keep up repayments on a mortgage or any debt secured on it.
