Protection insurance explained Income protection
Most employers won't support their staff for more than a year if they’re off sick from work. Millions of us have insurance policies such as mortgage insurance, private medical insurance and payment protection insurance (PPI).
And yet, while some of these products do have a role to play, the one protection policy that every working adult in the UK should consider is the very one most of us don’t have - income protection.
In fact, a recent industry survey showed less than a quarter deemed protecting their income essential, compared with 74% who said the same of broadband access. We don't agree.
What is income protection?
Income protection pays out if you're unable to work due to sickness or accident. Formerly known as permanent health insurance, long-term income protection pays out until retirement, death or your return to work, while short-term income protection pays out for a set period, usually between one and five years.
Action point: Income protection doesn't usually pay out if you're made redundant, but will often provide 'back to work' help if you're off sick.
Payouts are usually based on a percentage of your earnings: 50% to 70% is the norm, and payments are tax free. Income protection policies only pay out once a pre-agreed period has passed, generally ranging from one to 12 months after you put in a claim.
The longer the 'deferral' period you choose, the lower your premiums. For example, if your employer pays your salary for six months, then you'll need cover to start from the seventh month of sickness, ie a six-month deferral period,
Types of income protection policy
Long-term income protection policies pay out until a fixed age, death or your return to work, and they're underwritten at the point of applying for the policy, rather than when you put in a claim. This means you'll know exactly what you’re covered for from day one, as well as any pre-existing conditions you're not insured for.
Types of long-term income protection include:
- Guaranteed: Premiums won’t go up unless you increase the level of cover. These policies are the clearest.
- Reviewable: Can be cheaper at the beginning of the policy term, but the price can go up after a set number of years or with as little as 30-days’ notice.
- Age-related: The premium starts cheaper but goes up by a pre-agreed amount each year as you get older.
How much does income protection cost?
Premiums can vary hugely and depend on a range of factors:
- Occupation: most insurers group jobs into four categories of risk. For example, clerical workers will usually be in group one, shop assistants in group two, plumbers in group three and construction workers in group four.
- Deferral period: the longer you can wait to receive a payout once you've put in a claim, the cheaper your premiums will be.
- General state of health: pre-existing conditions will often be excluded, but some insurers may cover you in exchange for higher premiums
- Whether you smoke: most insurers will charge you much more if you're a smoker.
- The level of cover you need: Subject to maximum cover levels, the higher the level of protection you choose, the more you'll pay.
For examples of how much income protection might cost with different providers, read our full Income Protection guide.
Looking to buy life insurance?
If you decide you need advice, make sure you consult an independent life insurance broker.
Which? Financial Services can refer you to an impartial, no-obligation third-party advice service to provide you with the best life insurance or mortgage insurance policy tailored to your individual needs.
Find out more about the life insurance referral service at Which? Financial Services.
- How to buy life insurance - get the best term assurance or whole-of-life policy
- Income protection - read our full guide to protecting your income if you're ill or injured
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