If you are unable to work due to illness or injury then Income Protection can provide the financial security to maintain a standard of living whilst you focus on your health.
Income Protection pays you a tax free monthly amount, typically until either you return to work or you retire, although, shorter versions are available.
The flexible features of this income replacement insurance allow you to tailor your policy to meet your requirements in an affordable manner by choosing the amount of pay-out, how long you wait to receive it (known as a ‘deferred period’) and how long you will continue to receive it for.
Who needs Income Protection?
In short, everyone! An income protection policy is essential financial planning whether you are employed or self-employed.
Do you have a mortgage or rent to pay?
Do you have bills and utilities to pay?
Do you have dependents?
Do you eat food?
Employed and receive sick pay?
If you are fortunate to receive sick pay from your employer then income protection can neatly dovetail with this to ensure a continuous monthly payment is received by choosing a ‘deferred period’ to match your sick pay.
Therefore when your sick pay finishes, your income protection will start paying you a monthly income, with the difference being that this payment is not subject to income tax.
Can I claim if I’m self-employed?
Yes, and the self-employed are perhaps the most in need of income protection because if you are unable to work, who is paying you?
In principle the policy works the same as for employed in that if a doctors sign you off as unfit to do your work then a claim can be made.
Careful attention should be paid to how long you could survive without receiving any income and choose a deferred period accordingly. The self-employed should typically opt for a shorter deferred period to limit the amount of time without income or depleting hard earned savings.
Got a question? Income Protection is complicated so please speak to our friendly advisors who can put it all into plain English.
Deferred period explained
When you apply for Income Protection you will be required to choose a deferred period for when you can start claiming on the policy and the longer the deferred period, the cheaper your insurance premium will be.
Whilst often chosen to correlate with sick pay it is essential that everyone considers how long they can manage on reduced income/savings before they start to receive their pay-out.
Most income protection plans offer a deferred period option of 4, 8, 13, 26 or 52 weeks, which is the exact amount of time you must wait before the start to receive this replacement income.
If you have a tiered sick pay arrangement a combination of these deferred periods is also possible, for example, if you receive 6 months full pay followed by 6 months half pay.
How much will I get?
There are limits as to how much cover you can have in place and these are typically up to about 50 – 65% of your earnings, depending on the insurer. Please remember that income protection is paid out take free so these payments work out proportionately higher. Whilst the limits vary, all insurers do restrict this to less than your actual income, to give you an incentive to go back to work!
How much will Income Protection cost?
Many factors determine how much income protection insurance costs, it is not just how much cover you want to receive or what deferred period you choose.
Your premiums will also be based on your age, your health, your occupation and how long you want to receive the pay-out for. Typically income protection will provide a replace income until you retire but shorter versions that limit the pay out (per individual claim) to 1, 2 or 5 years are available. Choosing a restricted shorter claim period will reduce the monthly premium.
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Ultimately, Income Protection and Critical Illness Cover are of equal importance, they are simply designed to provide different benefits. It is common for people to claim off both simultaneously but it is also possible that one will pay out where the other won’t.
For example, a common Income Protection claim is for mental health with people being signed off work long term for stress, anxiety and depression. This is not a critical illness claim.
However, treatment for an early stage cancer, such as carcinoma in situ of the breast or low grade prostate cancer, can mean that people are not signed off work for long enough to make an income protection claim, but are included in many critical illness policies.
Why use a broker to arrange Income Protection?
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Income Protection is a complex product with multiple permutations as to how it can be arranged and big differences between provider costs.
Our advisers can guide you through this difficult area to ensure you arrange the best value policy for your individual circumstances.
Won’t Statutory Sick Pay (SSP) provide?
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If you are employed and unable to work then Statutory Sick Pay will provide a short term benefit which can be received whilst also claiming Income Protection.
SSP will currently (as of April 2023) pay out a weekly benefit of £109.40 for up to 28 weeks after you have been signed off work for longer than 3 days.
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