What is Income Protection Insurance?
Income Insurance typically provides you with cover should you lose your income through an accident, sickness, or unemployment.
Knowing that your income is protected will help to give you peace of mind that you'll always have money enough to live on should you be unable to work.
Income protection insurance works by paying you a regular sum for a set period of time after you place a claim. It is typically paid as a lump sum each month instead of being tied to a particular debt such as your mortgage.
Who is Income Protection Insurance suitable for?
Income Protection Insurance is by no means essential or something that every working person must commit to, and there's no obligation to buy it at any particular point in your life. However an income protection policy could prove invaluable if you fall ill, have an accident that incapacitates you, or face redundancy or unemployment.
If nothing else, income insurance will provide you and your family with the security of knowing that if the worst happened you would still have some money coming in to cover your day to day living costs. This is particularly useful if you have little in the way of savings or another source of household income to fall back.
For example, if you are an employee and become ill or have an accident that prevents you from working for at least four days in a row, you'll be entitled to up to 28 weeks of statutory sick pay if your employer doesn't have a sick leave payment scheme of their own in place (your work contract should set out what you're entitled to).
This means that you're guaranteed to have a source of income for a few months after becoming ill, but if you are still unable to work after that point, you would have to turn to state benefits.
However, it's worth noting that at just £87.55 a week, statutory sick pay is unlikely to be enough to cover your basic living expenses. Likewise if you lose your job through redundancy you may be entitled to statutory redundancy pay for a limited time, but this won't usually be enough to replace your income completely and would not help if your unemployment was not due to redundancy.
This kind of temporary pay carries no guarantee that it will tide you over until you find another job, which leaves you at the risk of having to severely cut down on the amount you spend - and could lead to you having to default on your mortgage payments which would put your home in jeopardy.
Although there are several benefits you may be able to claim if you were unable to earn your own income, existing on these alone is unlikely to bring in enough money for you to maintain your current lifestyle. This is where income insurance comes in - it will aim to return you to the same financial status you enjoyed while you were able to work.
If you're trying to cut costs income protection cover may seem like an unnecessary extra, but if you shop around for a decent policy that provides you with the cover you need at a price you can afford, then it can be worthwhile having the back-up in place should you need it.
Having some kind of income protection cover in place can be particularly valuable if you are self-employed, because you will be less likely to be able to cover the cost of living if you fall ill and can no longer work.
This is because you won't be in receipt of any statutory sick pay and won't be part of any employee-related insurance schemes. In this case a regular payout from your salary insurance policy will help to replace money you previously earned through self-employment.
What should I look for in an Income Protection Insurance policy?
Usually the maximum amount you'll be able to claim through an Income Protection policy is equivalent to the salary that you were earning after tax, minus the benefits that you'll now be able to claim, although this does vary from provider to provider.
When you take out a policy you should be able to specify how much cover you need a month, generally up to 70% of your income - so you'll need to think about how much you would need to cover your living expenses if you were no longer receiving a salary.
Once you make a claim your loss of income insurance will continue to pay out until the date you have selected for your cover to end, or the date that you return to work if this is sooner. Many policies limit their maximum claim period to 1 or 2 years while other, more expensive policies, will offer to pay out indefinitely if you are unable to return to work for a sustained period - this tends to be for accident and sickness policies only. Again, you'll need to balance the income reassurance you require with affordability when choosing a policy.
There will also be a waiting period between when you first place a claim and when the policy will start paying out - 30, 60, or 90 days is typical - so this is something to take into account when choosing your policy. If you have savings that will tide you over for a couple of months then a longer wait wouldn't be too much of a problem for your day to day finances. However, if you have little in the way of financial backup then opting for a policy that pays quickly could be a wise choice.
It is also a good idea to look for a policy that backdates any claims to the first day you became unable to work. These will provide you with the most reassurance that you'll be able to cover costs on an ongoing basis, even if you have to wait 30 days or so to receive the benefit. Be sure to compare income protection insurance and shop around to secure the best cover for your needs. See our income protection comparison for help on getting the best salary protection possible..
Most Income Protection Insurance products will specify a minimum and maximum age at which you can apply. The minimum age is normally 18 and the maximum usually extends to an average retirement age - around 60 years old.
Different Income Protection Insurance policies will have different restrictions, allowances and exclusions in place, so it is important to shop around and compare the features, benefits and terms and conditions of any salary insurance policy that seems suitable before making a decision - getting more than one income protection quote is essential.
You can use our Income Protection comparison which will allow you to carry out a comparison of the detailed terms and conditions from the results table.
Make sure you check the small print of the policies available to find out under what circumstances they would settle a claim. Some policies will only pay out if you find yourself unable to do any sort of work whatsoever, meaning you would have to be seriously incapacitated to qualify.
In contrast other policies will pay out if you are unable to do the line of work you carried out prior to your loss of income, so this is something worth checking before you settle on an income protection policy.
How much does Income Protection Insurance cost?
While ultimately the cost of insuring your income will depend on the provider you choose and the type of cover you require, the cost of your premiums will also be based on a few common factors:
Amount of income protected - the amount of money that you want to cover with salary insurance will have an effect on how much you pay in premiums. The higher the sum you wish to insure, the more it is likely to cost you in premiums.
Length of policy - you can usually select the length of time you would like your policy to pay out for in order to replace your income until you can support yourself again. Naturally the longer you wish the policy to pay out for, the more you're likely to pay in premiums to justify this larger pay-out.
Waiting period - there will be a length of time between making a claim and the policy beginning to pay out to replace your income. The shorter you want this waiting period to be, the more you're likely to pay in premiums.
Backdated claims - if you are making a claim that is backdated, i.e. you wish your income protection policy to pay out from the point at which you became ill or were made redundant, this is another thing that can affect how much you'll pay in premiums.
Other benefits - if, as result of losing your income, you can now claim benefits such as Income Support, this will also have an effect on whether your policy will pay out.
Occupation - some jobs will be seen by a potential insurer as a greater risk than others, and more likely to contribute to an illness or cause an accident, or more vulnerable to redundancy for which you would make a claim. If you work as a stunt person, for example, you're likely to be charged higher premiums than if you work as an office clerk.
Age - the older you are, the higher your premiums are likely to be because statistically you are more likely to fall ill to the point that you are unable to work.
Health - if you have pre-existing health conditions it's possible that a potential insurer will decide not pay out for claims relating to these conditions; however, you should still be able to take out cover. Nevertheless, the healthier you are, the more likely you are to secure lower premiums.
Lifestyle - whether or not you smoke can sometimes play a role in the amount you'll pay in premiums as some insurers will offer preferential rates for non-smokers.
As with any type of insurance where the cost of premiums is proportionate to risk, it's worth checking what different insurers define as 'high-risk'. Different insurers may put the same job in different risk categories, so it is always worth getting more than just one income protection quote to compare.
If you're looking for budget income protection insurance you should shop around for cover. With dozens of insurers offering cheap cover, obtaining quotes from a number of sources is a good way to find the most competitive premium.
A second way to reduce the cost of your cover is to increase your 'deferred period'.
Generally speaking, the longer you are prepared to wait for your policy to pay out, the cheaper your premium will be. However, always make sure that you have sufficient savings or financial resources to fall back on if you do choose to wait 26 or 52 weeks for your affordable salary protection insurance to kick in.
You could also consider reducing the amount of cover. Either reducing the percentage of your income that you cover or reducing your monthly benefit should have the effect of bringing your premiums down.
Ultimately, if you are paying for income protection insurance it's important that the policy will pay out if and when you need it to. For this reason when you compare quotes you need to look for a policy that offers a compromise between affordability and the amount of cover you would need should you lose your income.
What else should I consider?
Income Protection Insurance won't necessarily cover you against every possible case of illness, accident, or unemployment, so it shouldn't be seen as a catch-all insurance that will pay out if you are unable to work for all reasons.
Because of this it's important to check potential policy exclusions and ensure you are happy with these before signing up.
What's the best way to buy Income Protection Insurance?
When you've decided that you'd like to take out Income Protection Insurance, you should first do some research into the range of policies on the market to see what is available and what sort of cover might suit you.
By comparing different income protection insurance policies and policy providers, you'll be able to get a good idea of what price you can expect to pay and how well covered you will be before you commit.
As tedious as it can be, reading the small print is essential when buying this type of income replacement insurance policy. One clause in your agreement could mean the difference between being able to claim and being without the income protection cover you thought you'd bought.