How it works
Income protection insurance is a long-term insurance policy to help you if you can't work because you're ill or injured.
- It replaces part of your income if you can’t work for a while because you become ill or disabled.
- It pays out until you can start working again or until you retire, die or the end of the policy term whichever is sooner.
- There's a waiting period before the payments start. You generally set payments to start after your sick pay ends, or after any other insurance stops covering you. The longer you wait, the lower the monthly payments.
- It covers most illnesses that leave you unable to work, either in the short or long term (depending on the type of policy and its definition of incapacity).
- You can claim as many times as you need to, while the policy lasts.
It's not the same as critical illness insurance, which pays out a one-off lump sum if you have a specific serious illness.
It's not the same as short-term income protection, which also pays out a monthly sum related to your income, but only for a limited period of time (normally between two and five years) and usually covers fewer illnesses or situations.
What does income protection insurance cover?
It covers most illnesses that leave you unable to work – but whether that means 'unable to work at your current job' (perhaps due to work-related stress) or 'unable to work at all' (perhaps due to a serious heart condition) depends on the type of policy you choose and the definition of incapacity in your policy.
There are three definitions of incapacity, which form the three basic levels of cover you can get. Always check the policy and make sure you understand all the definitions before you buy.
get professional advice
With income protection insurance, everything depends on getting the right policy – so you'll probably want to speak to a professional financial adviser or broker.
What income protection insurance doesn’t cover
Usually the policy comes with a list of specific illnesses or situations it won’t cover, called exclusions. These may include one or more of the following:
- pre-existing medical conditions (any illness you already knew about when you bought the policy)
- normal pregnancy
- self-inflicted injury
- disabilities or illnesses that are due to criminal acts
- misuse of alcohol or drugs
- disabilities or illnesses if you are involved in war, riots, invasion, or terrorism
If you have existing health problems or a dangerous job you might not be able to get cover at all.
Do you need income protection insurance?
It doesn't matter whether or not you have children or other dependants – if illness would mean you couldn't pay the bills, you should consider income protection insurance.
You're most likely to need it if you're self employed or employed and you don't have sick pay to fall back on.
Check what your employer will provide for you if you're off sick.
Who doesn't need it?
You probably don't need income protection insurance if…
- You're not so incapacitated that you need to be medically discharged. But consider how you will cope if you were discharged - see Medical discharge.
- You could survive on government benefits – but they might not be enough to cover all your outgoings
- You have enough in savings to support yourself – remember that your savings may need to see you through a long period.
- You could take early retirement – if you're near retirement age, perhaps you could afford to retire early. If you are unable to return to work you may be entitled to take your pension early.
- Your partner or family would support you – perhaps your partner has enough income to cover everything the two of you need.
- You have debts or no savings – if you could afford to save money or buy income protection insurance, but not both, you may consider it better to save. And paying off debts is the first step in any financial plan.
Choosing the right policy
If you become too ill to work and you have the right income protection insurance policy, you will get an income until the policy expires. Picking the right cover means matching your needs and personal circumstances to the best policy available. You may need to get professional advice from a financial adviser or someone from the SIIAP accredited companies to help you decide.
Level of cover
There are three main levels of cover to choose from which define incapacity – basically, how ill you have to be before your policy pays out.
- Own occupation: you can't do your own occupation.
- Suited occupation: you can't do your own job or a similar one that suits your qualifications and experience.
- Any occupation: you're too ill to do any kind of paid work.
In most cases, ‘own occupation’ cover will be the most expensive and ‘any occupation’ cover the cheapest.
Most complaints about income protection insurance are about whether or not a consumer meets the definition in their policy. An ‘own occupation’ definition – when the policy pays out if you are unable to do your own job – makes it more likely that you will make a successful claim.
Length of pay out
Your policy will only pay out up to a maximum stated limit. The maximum length of time will be to the expiry date of the policy, usually set to tie in with your retirement date, the day your children finish full time education, or the length of your mortgage.
There are also policies that pay out for a fixed period such as five years and these will be less expensive.
If, following a claim you return to work, but then shortly afterwards fall ill with the same complaint, the insurer will regard this as a continuation of the first claim and pay benefit straight away.
You can claim many times under the same policy if you are off work repeatedly due to ill health.
How to reduce the cost of the premiums
You can reduce the cost of income protection premiums, although this will mean you receive fewer benefits if you come to make a claim. You've got two main options:
- Leaving a gap before you claim - deferred period
- Reducing the term of the policy
Choosing income protection insurance
- Get expert advice. The definitions of 'incapacity', 'disability' and 'any occupation' are complex, ambiguous and can vary by provider. Even if you think you understand the small print you can still be caught out. Most complaints about income protection insurance are about whether or not a consumer meets the definitions in their policy.
- Decide on the level of cover. Think carefully about whether to take an 'own occupation' or 'any occupation' policy. Own occupation provides the highest level of cover and makes it more likely that you will make a successful claim. There are very few circumstances where you couldn’t do any kind of paid work at all, so you are less likely to be able to claim under an 'any occupation' policy.
If you deliberately leave out any medical information it can invalidate your policy and affect your claim.
Read the small print
Read the terms and conditions before you take out the policy so you know exactly what is and isn't covered. If there are any areas you don't understand, ask the insurance provider or insurance broker right away.
Changing your mind
The rule for income protection is that you can cancel your policy any time in the first 30 days and get a refund of any premiums you’ve paid.
Use a specialist broker or an independent financial adviser
Income protection policies vary widely in the cover they offer, and your personal circumstances need to be taken into account. The best way to make sure you get what you need is to seek advice from an independent financial adviser, specialist broker from one of the SIIAP accredited companies or the White Ensign Association's directory. They might charge a fee for their services – or they may be paid in commission by insurance companies.
Other types of insurance to consider
There are several different types of insurance you can use to protect yourself from money problems if you're ill or injured. Take a look at the table to get the main differences.
Do you need life insurance? This product provides some financial support to your dependants if you die.
Do you need critical illness insurance? This type of policy will provide you with a tax-free ‘lump sum’ if you’re diagnosed with a serious illness covered by your policy.
Do you need payment protection insurance? Payment protection insurance will cover selected payments, such as your mortgage, if you can’t work because you’re ill, had an accident or get made redundant.
Do you need short term income protection? This product will cover your essential outgoings if you can’t work for a short period of time.
Making a claim
If you need to make a claim on your policy, see Making a claim.