What is income protection insurance?
Formerly known as permanent health insurance (PHI), long-term income protection (IP) is an insurance policy that pays out if you're unable to work because of injury or illness.
IP usually pays out until retirement, death or your return to work, although Short Term IP (Stip) policies are also available at a lower cost. Neither IP or Stip pays out if you're made redundant - but they will often provide 'back to work' help if you're off sick.
Is income protection the same as PPI?
Let's be clear - income protection isn't the same as the widely mis-sold payment protection insurance (PPI). Where PPI covers a particular debt and any payouts go to your lender, income protection hands you a tax-free proportion of your income if you're unable to work because of illness or injury. How you spend the money is up to you. If you think you've been mis-sold PPI, you can put in a complaint using our free PPI tool.
Why do I need IP?
Only a minority of employers support their staff for more than a year if they're off sick from work (see our guide to statutory sick pay). Given the low level of state benefits available, everyone of working age should consider IP. But when we asked the public, just 9% said they have some form of IP, compared with 41% who have life insurance and 16% who have private medical insurance (PMI).
One industry survey showed that less than a quarter of people deemed protecting their income to be essential, compared with 74% who said the same of needing access to broadband internet.
Millions of us have policies such as private medical insurance and payment protection insurance, sold to us over the years by salespeople who convinced us we needed protecting. However, while they were right about the protection, they were often wrong about the policies. The one protection policy every working adult in the UK should consider is the very one most of us don't have - income protection.
How much will IP cost?
Your health, whether you smoke and level of cover needed will weigh into your premium, but your type of job also plays a major part in determining what you'll pay. Many insurers group jobs into four categories of risk, though some have more. For example, jobs may be divided into the following groups:
- Class 1: Professional; managers; administrative staff; staff with limited business mileage; admin clerk; computer programmer; secretary.
- Class 2: Some workers with high business mileage; 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 want to check which occupational class you're likely to fall into, Drewberry Insurance has a handy income protection occupation definition calculator.
How much does income protection pay out?
Income protection payouts are usually based on a percentage of your earnings: 50% to 70% is the norm. Payments are tax-free.
IP policies pay out only 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. The default deferral period tends to be 13 or 26 weeks.
Most IP providers report paying high proportions of claims made to them. For 2015, insurance giant Aviva published that it had paid 92.4% of IP claims, while LV paid 92%. British Friendly paid out 96.7%.
What about ASU?
ASU policies are a cheaper alternative, named because - depending on your choice - you can buy policies to cover you in the event of accident, sickness or unemployment. Like Stip policies, they'll typically provide cover for around one to two years. The main difference with ASU policies is they're sold without full medical underwriting - which means you have less certainty that you'll be covered when you put in a claim.