Understanding protection insurance Income protection basics

Working parents

If you have dependants, insurance should be a priority

Millions of us have policies such as critical illness, private medical insurance and payment protection, sold to us over the years by salespeople who convinced us we needed protecting. However, whilst they were right about the protection, they were wrong about the policies.

The one protection policy that every working adult in the UK does need is the very one most of us don’t have - income protection (IP).

What is IP?

IP is an insurance policy which provides you with a regular tax-free income if you can’t work because of illness or disability. The benefit paid is up to a maximum percentage of your earnings, often 50% or 60%.

Policies pay out after you have been off work for a period of time known as the ‘deferred period’, and will continue to pay out until you can get back to work or until the end of the policy term – usually retirement.

You can choose a deferred period of four, 13, 26 or 52 weeks, depending on how long you may be able to survive on any savings or how long you receive sick pay from your employer.

The longer the deferred period, the lower the cost; for example, with some policies a four week period would cost more than twice as much a month than a 26 week deferred period.

Do I need it?

Ask yourself the following questions. If your answer is no to all three, then you need some form of IP:

  • Will your employer continue to pay you a percentage of your salary indefinitely if you are off sick?
  • If not, and you are part of a couple, could you pay all the bills and live on your partner’s income indefinitely?
  • If not (or you are single) do you have savings you could live off indefinitely?
nurse standing in an operating theatre

If you ended up in hospital, how would you meet your rent or pay your mortgage?

Remember: Illness, accident or disability can happen to anyone. Currently 2.2 million people of working age will be off work for at least six months because of sickness and disability, and more than 2.6 million people are claiming incapacity benefit.

Which policy should I go for?

There are three main types of policies you can choose from: guaranteed, age-related and reviewable.

Guaranteed: What you pay stays the same throughout the policy term. The only reason the premium will go up is if you increase the cover in which case the premium will increase pro rata. Most guaranteed policies cost slightly more to start with, but often not that much more. If you can afford the extra cost, they are the best in our view.

Reviewable: These are reviewed by the provider after a set number of years, when the premium may go up. Reviews every five years are common. Reviewable policies tend to start off cheaper than guaranteed policies, but often not by very much. Our survey found they cost between £4 and £10 a month less than guaranteed policies for low-risk occupations and between £7 and £18 a month less for high-risk occupations.

Age-related: These are a good choice for people in higher-risk jobs, women and smokers because the premiums for these policies aren't affected by gender, occupation or whether you smoke, and they can start off cheaper than either guaranteed or reviewable policies. The pay-off for this is that premiums do go up each year as you get older. However, you'll know in advance how much the increase will be, so there should be no nasty surprises.

How much do I need?

How much cover you need and when it should be paid depends on what other back-up you have. For example, if your employer pays your salary for six months, then you'll need cover to start from the seventh month of sickness. 

If you’re self-employed but have savings you could fall back on for three months, then cover should start from the fourth month. You'll receive some state benefits (see State benefits), so take that into account when deciding how much cover you need.

The good thing about IP is that it can fit around your life. You decide how much cover you need and when you need cover to start.

What will it cost me?

Builders standing around

Your premium will depend entirely on your employment and circumstances

Premiums can vary hugely and cost is based on your gender (women pay more than men); occupation; general state of health; whether you smoke and the level of cover you need.

For example, a non-smoking man aged 30 in an administrative job could pay between £17 and £36 a month for a policy that pays out £1,000 a month benefit after 26 weeks. However, a painter and decorator of the same age could pay between £35 and £112 a month, depending on the provider.

Age-related policies don't take gender, occupation or whether you smoke into account.

How your job affects what you pay

Your job can affect how much you pay for a policy (except with age-related schemes).  Most insurers group jobs into four categories of risk, though some have more. 

We asked income protection providers to tell us how they grouped jobs and to give us examples of jobs in each class. 

Here are some examples, but be warned - the same job may be treated differently by different providers.

  • Class 1: Professional, managers and administrative staff. Limited business mileage. Admin clerk, computer programmer, secretary
  • Class 2: Some workers with high business mileage over 20,000 miles a year. Limited light skilled manual work. Engineer, florist, shop assistant
  • Class 3: Skilled manual workers and some semi-skilled workers. Care worker, plumber, teacher
  • Class 4: Heavy manual workers and some unskilled workers. Bar person, construction worker, mechanic

If you're an unpaid worker

Even if you don't have an income, you may still need cover. If you are a carer, ask yourself how your family would cope if you were long-term sick and unable to carry out your caring duties? If they would have to pay for care, then you need some cover. However not all policies offer cover for carers, so do your homework. Our tables tell you which ones do.

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Which? works for you