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 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. It may also offer you access to a wider range of medical specialists and access to drugs and treatments that may not be accessible on 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 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, so check your contract to see whether or not it is provided.

What 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 £96.35 for up to 28 weeks. 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 £60.00 and £89.60 and the mobility part ranging between £23.70 and £62.55. 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 £74.70 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 £74.70 a week. If not, you’ll be placed into the support group and receive up to £114.10 a week.

You can read more about the ESA in our article Unemployment benefits: what are you entitled to?

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 £324.84 a month. Joint claimants both aged over 25 will receive £509.92 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), last year saw a record amount paid out for life insurance, income protection and critical illness cover claims in 2020, with income protection claims totalling nearly £700m. The average payout for income protection policies was £22,000. Of particular note was a rise in people claiming income protection for mental health reasons, quite possibly due to the challenges created by Covid-19 and lockdown measures. These figures go to show how suddenly circumstances can change, and how crucial income protection can be.

There are a number of fee-free income protection brokers available in the market, but if you’re looking for somewhere to start, we’ve partnered with life insurance expert Teddy Cenaj. He can provide you with fee-free advice on buying income protection insurance, quotes from the whole of the market, and help finding the right cover for you.

Do you have income protection cover, or have you ever made a claim on an income protection policy? If so, we’d be interested in hearing from you. You can join the money conversation on the Rest Less community or leave a comment below.

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