Being financially prepared for the unexpected is vital, especially as life has a habit of throwing us a curveball every now and then.
If you suddenly had to stop work because of an illness or accident, for example, an income protection policy could provide a valuable safety net.
But before you go looking for protection, you should check how much cover you might already have in place, either through your workplace or that may be provided by the government.
What workplace benefits do I have?
Your employer may already provide you with some level of financial protection. You can normally find this out by checking your contract or pension documents, or asking your workplace’s HR department.
For example, your workplace might provide you with one or more of the following as part of an employee benefits package:
Income protection insurance
An income protection policy will cover you if you become unable to work due to injury, illness or an accident. This is paid to you as a regular income, rather than a lump sum, either until you are able to return to work or until you retire.
Bear in mind that this amount will not be the same as your usual pay, and will typically be closer to a half or two thirds of your salary. This is because the income from this policy will be tax-free, and you will likely be able to claim state benefits as well.
You can read more about income protection in our article Income protection explained.
Life insurance
Your work may provide a life insurance policy, meaning that if you were to die, your dependents would receive a lump sum payment to support them, usually equivalent to a few years’ worth of your current salary. This can be used for anything from funeral costs to covering mortgage costs or general living expenses. You can find out more in our article Do I need life insurance?
Critical illness cover
A critical illness policy will pay out a lump sum to employees who become unable to work due to certain serious medical conditions, such as strokes, heart attacks or cancer. This differs from income protection in that it is paid all at once rather than as a regular income. You can read more about it in our article Everything you need to know about critical illness cover.
Private medical insurance
If you fall ill and need to seek private treatment then your employer may offer private medical insurance as an employee benefit, which will cover some or all of these bills. Private medical cover may also offer you access to a wider range of medical specialists and drugs and treatments than you can get from the NHS. You can learn more about how private medical insurance works in our guide Do I need private health insurance?
Sick pay
Your employer may provide you with additional sick pay, on top of the statutory sick pay that you are already entitled to (we cover this in the next section). There is no legal obligation for them to provide extra sick pay, however, so check your contract to see whether or not it is provided.
Which government benefits might I be eligible for?
Depending on your circumstances, you might be able to claim certain state benefits if you fall ill. Bear in mind that these often don’t amount to very much, so it might still be worth looking into additional protection if you feel like they won’t provide you with sufficient cover.
Statutory sick pay
If you are unable to work because of illness then you are legally entitled to statutory sick pay from your employer. This is paid at a rate of £116.75 for up to 28 weeks (in the current 2024/25 tax year). You can read about the eligibility requirements for statutory sick pay on the GOV.uk website.
Personal Independence Payment
The Personal Independence Payment (PIP) can provide tax-free financial support if you have a long term mental or physical condition, and have difficulty doing everyday tasks or moving around. You can get this even if you are still employed, have savings or have other benefits at the same time.
This is paid in one or both of two parts – the daily living part and mobility part – depending on if you struggle with everyday tasks or moving around respectively. The specific amount paid in each part will depend on how much you struggle with that task, with the daily living part currently ranging between £72.65 and £108.55 and the mobility part ranging between £28.70 and £75.75. Payments are typically made every four weeks.
You can find out more about PIP and whether you might be eligible to claim in our guide Personal Independence Payment explained.
Employment and Support Allowance
The Employment and Support Allowance, or ESA, can support you if you are unable to work due to illness or disability, or if your ability to work is impacted by either of these. You’ll have to attend a Work Capability Assessment to find out how much you can claim – until this is completed you’ll be paid an assessment rate of up to £90.50 per week.
Following the assessment, you’ll either be placed into the work-related activity group or the support group. If you’re expected to be able to return to work in the future, you will be put into the work-related activity group and receive up to £90.50 a week. If not, you’ll be placed into the support group and receive up to £138.20 a week.
You can read more about the ESA at GOV.uk.
Universal Credit
Universal credit is a monthly payment (or twice a month for some people in Scotland) that you may be able to claim if you are out of work or on low income, or off work due to sickness or disability.
It replaces the following benefits:
- Child Tax Credit
- Housing Benefit
- Income Support
- income-based Jobseeker’s Allowance (JSA)
- income-related Employment and Support Allowance (ESA)
- Working Tax Credit
If you’re single and aged over 25, the standard Universal Credit allowance is £393.45 a month. Joint claimants both aged over 25 will receive £617.60 a month.
Find out more about how Universal Credit works in our guide Everything you need to know about Universal Credit.
Do I need income protection insurance?
If your workplace doesn’t provide the benefits listed above and you don’t think the government benefits will be enough, or that you’re unlikely to be eligible for them, then it could be worth looking at taking out income protection insurance.
According to figures from the Association of British Insurers (ABI) and Group Risk Development (GRiD), 2023 saw a record £7.34 billion paid out across more than 275,000 claims on individual policies for life insurance, income protection and critical illness cover. The average payout for these claims was £17,053. As of 2023, more than 1,660 individual income protection claims have been paid out for over 10 years, with 376 of those claims paid for more than 20 years.
Yvonne Braun, Director of Policy, Long Term Savings, Health and Protection at the ABI, said: “Every single day in 2023, the protection insurance industry paid out over £20 million to individuals and families affected by serious accidents, illnesses or even the deaths of loved ones. The financial impact of these events can be devastating, adding even more stress to traumatic situations.
“These figures demonstrate that insurance plays a crucial role in supporting people financially when they need it most.”
Rest Less Money is on Instagram. Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.