Income Protection
Protecting Your Income If You Cannot Work
Your income pays for much more than your mortgage or rent.
It also pays for food, energy, council tax, transport and everyday living costs.
Income protection insurance can provide a regular income if illness or injury prevents you from working.
It normally replaces part of your income rather than all of it, subject to the terms of the policy.
Do You Need Income Protection?
Start with a simple question:
How would I manage financially if I could not work for several months — or longer?
Consider what you already have available, including:
- Employer sick pay
- Savings
- A partner’s income
- Workplace benefits
- Other insurance
- Any state support you may be entitled to
If these would not provide enough to meet your essential costs, income protection may be worth considering.
This can be particularly relevant if you are self-employed or have limited sick pay.
How Does Income Protection Work?
You choose a policy providing an agreed level of cover.
If illness or injury prevents you from working and you meet the policy’s definition of incapacity, you can make a claim.
After any applicable waiting period, the policy can provide regular payments based on its terms.
Income protection normally covers only a proportion of your previous earnings, rather than replacing your entire income.
What Is the Deferred Period?
Income protection does not necessarily start paying as soon as you stop working.
Most policies have a waiting period known as the:
Deferred period
This is the period between becoming unable to work and becoming eligible to receive payments under the policy.
For example, someone receiving six months of full sick pay from their employer might consider cover with a deferred period designed to begin when that sick pay ends.
The appropriate period depends on your own financial safety net.
Check Your Employer’s Sick Pay
Before buying income protection, find out exactly what your employer would pay if you became unable to work.
Ask:
How much would I receive?
and
For how long?
You might discover that you already have substantial protection through work.
Alternatively, you might find that your income would fall considerably sooner than you expected.
Knowing this helps you decide when you would actually need an income protection policy to start paying.
What If You Are Self-Employed?
Income protection can be particularly relevant if you work for yourself because you may not have the same sick-pay arrangements as an employee.
However, self-employed income can also make calculating a claim more complicated.
The Financial Ombudsman Service notes that insurers may require evidence of pre-disability earnings and that standard policies may not always treat self-employed or fluctuating income in the way somebody expects.
If you are self-employed, check carefully:
- How the insurer defines your earnings
- What financial evidence would be required
- How fluctuating income is treated
- How much you could actually receive
Do not assume the amount of cover shown on the policy is automatically the amount you would receive.
How Long Could the Policy Pay?
Policies vary.
Some provide benefits for a limited period if you make a successful claim.
Others may potentially continue paying for much longer, subject to the policy terms — for example until you recover sufficiently to return to work, reach the policy end age or another specified event occurs.
This can make a major difference to the protection being provided.
A policy designed to pay for a relatively short period is not equivalent to one designed to protect your income against a long-term inability to work.
So when comparing policies, ask:
How long could a successful claim actually pay me?
What Does “Unable to Work” Mean?
This is one of the most important parts of an income protection policy.
A claim depends on meeting the policy’s definition of incapacity.
The insurer may consider your health and your ability to carry out work or particular duties according to the wording of the policy.
The Financial Ombudsman Service specifically considers these definitions and the person’s ability to perform relevant job duties when reviewing disputed claims.
Do not buy a policy without understanding how it defines your ability to work.
Income Protection Is Not Redundancy Insurance
Income protection is generally designed for situations where illness or injury prevents you from working.
Do not assume it will pay because you:
- Lose your job
- Are made redundant
- Have fewer working hours
- Experience a fall in business income
Separate products may provide certain forms of unemployment or payment protection, but they work differently.
Income Protection Is Not Life Insurance
These products solve different problems.
Life insurance can provide money to the people you leave behind if you die.
Income protection is designed to provide income while you are alive but unable to work because of illness or injury, subject to the policy.
So someone may have a need for one, both or neither depending on their circumstances.
Income Protection Is Not Critical Illness Cover
These are also different.
Income protection can provide regular payments when you meet the policy’s definition of being unable to work.
Critical illness cover generally provides a lump sum if you are diagnosed with a specified condition and meet the policy definition.
You could therefore be unable to work without necessarily qualifying for a critical illness payment.
We will cover Critical Illness Cover separately.
How Much Cover Do You Need?
Start by working out your essential monthly spending.
Consider:
- Mortgage or rent
- Council tax
- Energy and water
- Food
- Transport
- Insurance
- Debt repayments
- Essential family costs
Then compare this with what you would receive from:
- Employer sick pay
- Savings
- Other household income
- Existing protection
This helps identify your potential income gap.
Remember that income protection policies normally limit the proportion of earnings that can be insured.
What Affects the Price?
The cost can depend on factors including:
- Your age
- Your health
- Your occupation
- Amount of income you want to protect
- Deferred period
- Length of cover
- When the policy ends
The nature of your job can be particularly important because some occupations carry a greater risk of illness or injury preventing someone from performing their normal duties.
Answer the Application Questions Carefully
As with other protection insurance, provide accurate information when applying.
You may be asked about:
- Health
- Medical history
- Occupation
- Income
- Lifestyle
- Existing protection
The information can affect the insurer’s decision, the premium, exclusions and what could eventually be paid.
If you do not understand a question, ask rather than guess.
Check for Exclusions
A policy may not cover every medical condition or circumstance.
For example, an insurer may apply a specific exclusion relating to a pre-existing medical condition.
The ABI notes that having a pre-existing condition does not necessarily prevent somebody applying, but an insurer may charge more or apply an exclusion depending on the circumstances.
Read the exclusions carefully before deciding whether the policy provides the protection you expect.
Review Your Cover When Things Change
Your financial circumstances will not necessarily remain the same.
You may:
- Change jobs
- Become self-employed
- Receive a significant pay rise
- Take on a mortgage
- Have children
- Reduce your working hours
- Build substantial savings
These changes can affect the amount or type of protection you need.
Review your cover periodically rather than assuming a policy bought years ago will always remain appropriate.
Compare More Than the Premium
Two income protection policies costing similar amounts can provide very different protection.
When comparing, look at:
Monthly benefit
How much could you actually receive?
Deferred period
How long would you wait before payments could begin?
Benefit period
How long could a successful claim continue paying?
Definition of incapacity
What must happen before you qualify?
Policy end age
When does the protection finish?
Exclusions
What is not covered?
Premiums
Are they guaranteed or could they change?
The lowest monthly premium may not provide the protection you actually need.
If You Need to Claim
Contact the insurer and follow the claims procedure set out in the policy.
You may need to provide evidence relating to your:
- Health
- Ability to work
- Occupation
- Previous earnings
An insurer may also review an ongoing claim to determine whether you continue to meet the policy conditions.
If you are unhappy with how an insurer handles a claim, complain to the insurer first. If the issue remains unresolved, the Financial Ombudsman Service may be able to consider the complaint.
Income Protection Checklist
Before buying, ask:
How long would my existing income continue if I stopped working?
Check employer sick pay and other resources.
How much do I actually need each month?
Work out your essential expenditure.
When should the policy start paying?
Choose the deferred period with your existing protection in mind.
How much could it pay?
Understand how the insurer calculates your benefit.
How long could it pay?
Check the maximum benefit period.
How does the policy define incapacity?
Make sure you understand what must happen before you qualify.
What isn’t covered?
Read the exclusions.
Would the cover still suit me if my circumstances changed?
Review it periodically.
Compare Income Protection
Do not compare income protection simply by looking for:
the cheapest monthly premium.
A cheaper policy with a longer waiting period, shorter benefit period or less suitable definition of incapacity may provide very different protection.
Compare what would actually happen if you became unable to work.
Energility’s insurance comparison service is coming soon.
Until then, our guides can help you understand what you are comparing.
The Bottom Line
Income protection is really about one question:
How would I pay my essential costs if illness or injury stopped me earning?
Start with the protection you already have.
Then identify the financial gap.
If you decide to buy insurance, pay particular attention to how much it could pay, when payments could start, how long they could continue and how the policy defines being unable to work.
Those details matter far more than the name on the policy.
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