If you’re worried about how you’d cope financially if you had to take time off work due to ill health, it may be worth exploring some of the ways you might be able to protect your income should the worst happen.

For example, income protection insurance, as the name suggests, is there to provide you with a regular income if you’re unable to work because you’re unwell or have had an accident or injury. However, redundancy is not usually covered by this type of policy.

Here, we explain how income protection works, and why you need to read the small print carefully if you’re considering buying a policy.

What is income protection insurance?

When you buy income protection insurance, you’re essentially insuring your income in case you fall ill or have an accident that prevents you from working.

In the event of a claim, income protection insurance will usually pay out a percentage of the amount you earn, typically around half your salary. You’ll receive this amount until you’re well enough to go back to work, or until you retire or pass away, whichever happens first. Payments are tax-free.

As with other types of insurance, you pay monthly premiums for income protection cover, and the cost of these premiums will depend on a range of different factors, including your age, how much cover you need, and your occupation. For example, someone who is older, works in a risky occupation such as construction and is a smoker, will have to pay higher premiums than a younger, non-smoker working in an office. This is because there’s a lower risk of them being off work due to illness or having an accident whilst carrying out their occupation.

Make sure you’re honest about your medical history and lifestyle when completing your application for income protection insurance, as if you aren’t and subsequently make a claim, your policy could be invalidated and your insurer may refuse to pay out.

When you first take out income protection insurance, there will usually be what’s known as a ‘deferred period’, during which you won’t be able to submit a claim. These periods typically range from 12-26 weeks, although you may be able to opt for a longer period as this could reduce the cost of your premiums.

Before choosing how long you want your deferred period to be, you need to work out whether your savings or any sick pay your employer might provide you with will last you. If it won’t cover your outgoings during this time, you may need to reduce the length of your deferred period.

What does an income protection policy cover?

Income protection insurance replaces part of your income if you’re unable to work due to illness or injury and in some cases will also pay out if you’re made redundant. Policies typically pay out after you’ve been off work for three to six months.

The specifics of what each policy covers will vary from insurer to insurer. However, to give an overview of the types of conditions you will be covered for, Legal & General found in 2020 that the three main reasons people claimed on their income protection policy was for musculoskeletal issues, cancer and mental health struggles.

How long is income protection insurance paid for?

Most income protection policies will come with a defined ‘payment period’ which is essentially the maximum length of time they will provide you with an income for if you are unable to work.

Different policies and insurers have different payment periods, but generally you should be able to choose between12 months, 24 months, 60 months or until the end of the policy life. Many people will opt for their payment period to cover them until their retirement age, for example, to ensure they are protected throughout their working life. The amount you pay for an income protection policy partly depends on how long you want to receive payments in the event of a successful claim.

What does income protection insurance not cover?

Any exclusions vary from insurer to insurer, but generally income protection will not cover the following scenarios:

  • You deciding to leave a job without having another one lined up;
  • You getting fired;
  • Claims made during the deferred period;
  • Disability – income protection insurance is largely based on illnesses and injuries that prevent you from working so it will only pay out for a disability for the duration that it stops you from working, and not for the disability itself;
  • Certain illnesses – not all illnesses are covered by income protection insurance, so always make sure to read the policy details carefully.

Check the small print

Income protection insurance policies tend to vary widely depending on which provider you choose, so you’ll need to check the small print so you’re clear on exactly what you are, and aren’t, covered for.

For example, some policies are arranged on an ‘any occupation’ basis, which means they will only pay out if you can’t do any type of work following your accident or illness. That means if you’re a builder, and suffer a leg injury, but you are still able to work in an office, your policy might not pay out. If however, your policy is arranged on an ‘own occupation’ basis, this means it will pay out if you can’t do your own job due to an accident or illness, rather than any job.

How much income protection cover do I need?

The amount of income protection cover you’ll need depends on your outgoings, and also on how much protection your employer might provide you with.

Start by checking how much sick pay they will offer, and for how long.

You should then tot up all your outgoings, such as your mortgage or rent, utility bills and Council Tax, along with any regular debt repayments for credit cards or loans. Once you deduct the benefits your employer might provide from this total, you’ll have a rough idea of how much you need to stay financially afloat if you don’t have your normal income coming in.

Remember that you may need to review your cover if your circumstances change at any point. For example, if you’ve taken out a bigger mortgage, or if your partner is no longer working, you might need to arrange a higher level of cover. Similarly, if you start working for a company that offers particularly generous benefits if you’re unwell, you might want to decrease the level of cover you have.

How long do you have to wait before the income protection policy will pay out?

If you fall ill or have an accident, you will usually have to wait at least three to six months before your income protection policy will pay out. The period between the start of your illness or accident is called the waiting, or deferred, period. You don’t have to make a claim immediately if you fall ill or suffer an accident, though. You can wait for up to two years before making a claim. This is because some employers offer enhanced sick pay packages that may mean you won’t need to claim before this point.

What are the benefits of income protection insurance?

The main benefit of income protection insurance is that you can continue to receive some sort of income, even if you are unable to work. It helps you to maintain the lifestyle you are used to and eases some of the pressure of getting back to work until you are actually ready.

Depending on your policy, you might also be covered for redundancy and for taking time off to care for a sick child, which again helps relieve some of the stress of these situations.

Do I really need income protection insurance cover?

Many people decide not to take out income protection insurance because they think it’s going to be too expensive, or because they hope they’ll never need to take time off work due to ill health or an accident.

However, according to research by MetLife UK, one in four homeowners have previously suffered an injury or illness, leaving them in financial difficulty which has resulted in them missing a mortgage payment.

A third of respondents said they have had to take four weeks or more off work due to an accident or illness, yet almost half of those with a mortgage (47%) said they currently have no financial protection to cover them in the event they are unable to work due to illness or an accident.

Separate research by LV= found that a third of people have not heard of or are not considering income protection, despite the valuable financial lifeline it could provide if you’re unable to work because you’re unwell or have had an accident.

Of course, if you’re lucky enough to have built up a significant savings pot, then you might decide you don’t need income protection insurance, as you can use your savings to help you make ends meet while you’re off work. Alternatively, your employer might offer generous support if you can work due to an accident or injury, although in most cases this support won’t last long-term.

If you decide to rely on state support, such as Statutory Sick Pay bear in mind that this is unlikely to be enough to cover your mortgage or rent, as well as all your other outgoings.

Before buying income protection insurance, check whether your workplace benefits already include this type of cover, or you may find they entitle you to cheaper rates from protection providers.

Remember too that there are other types of protection available that you might want to consider, including critical illness cover, which will pay out a lump sum in the event you’re diagnosed with one of the serious illnesses specified on the policy. You may also want to think about taking out life insurance, which is designed to pay your loved ones a lump sum when you die. Find out more about life insurance in our article Why life insurance matters.

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 Anorak. They 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.