Income protection Insurance – FAQs

The potential fragility of our individual incomes has never been more apparent than it currently is. With this increased awareness comes an opportunity for us all to take a moment to review how we are protecting ourselves, our loved ones and our income. One piece of good news is that the insurance industry has not suddenly shut-up shop but is still working to provide protection to individuals and business where possible. With that in mind we wanted to share some FAQ’s on Income Protection in the hope that this may assist you with deciding if this type of cover would benefit you.

What is Income Protection insurance?

Income Protection is an insurance policy that pays out if you’re unable to work because of injury or illness.  Income Protection usually pays out until retirement, death or your return to work, although short-term income protection policies, which last for one or two years, are also available at a lower cost.

Why do I need Income Protection insurance?

Only a minority of employers support their staff for more than a year, if they’re off sick from work. Given the low level of state benefits available, everyone of working age should consider a plan to provide an income. If there is one insurance policy that every working adult in the UK should consider – it’s the one most of us don’t have – income protection.

How much does Income Protection cost?

Your health, whether you smoke and level of income needed will weigh into your premium quote. Your type of job also plays a major part in determining what you’ll pay.

How much does Income Protection pay out?

Income protection pay-outs are usually based on a percentage of your earnings: 50% to 70% is the norm. For example, if you earn £40,000 a year, take out an Income Protection policy designed to pay out 60% of your salary. Your policy will pay out £40,000 x 60% = £24,000 a year.  The good news is that payments from Income Protection policies are made free of income tax.

When does Income Protection pay out?

Income Protection policies pay out only once a pre-agreed period has passed, generally ranging from one to 12 months after you put in a claim. The longer the ‘deferral’ period you choose, the lower your premiums. The default deferral period tends to be 13 or 26 weeks, but it can sometimes be as low as one week.

Are there exclusions?

Income Protection doesn’t cover most pre-existing conditions and failure to follow professional medical advice may also be impacted if you made a claim. Each provider will have their own policy exclusions so it’s important to check.

Income Protection plans typically have no cash in value at any time and cover will cease at the end of term. If premiums stop, then cover will lapse.

Benefits of reviewing and having the right protection in place?

  • Review your employment contract, to see what benefits you currently have in place.
  • Would your employment benefit cover you and your expenditure if you were unable to work for 6/12 months or even years?
  • How many months do you have in reserve to cover the deferred period?
  • If you already have an income protection policy in place, has anything changed since you took the policy out e.g. increased your mortgage payments, expenditure increased, dependants, etc.?

Benefits of Income Protection for self-employed?

Income Protection insurance for the self-employed is one of the most important insurance policies to consider. When you become self-employed you no longer have access to insurance cover provided by an employer. Therefore, if you become ill or have an accident and are unable to work then your income would cease or be severely reduced.

Without income protection you will have to claim Employment & Support Allowance (ESA) in order to pay your bills. Employment allowance is initially paid for up to 13 weeks after your claim. The initial payment is £57.90 a week if you are under 25 or £73.10 a week if you over 25. In contrast, self-employed income protection cover could provide you with up to 70% of your gross income.

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