Income Protection Insurance is designed to replace a proportion of your monthly income should you suffer an accident, sickness or unemployment that prevents you from working.
The payout allows you to keep up with all your essential core expenditure, from mortgage / rent to utilities and grocery shopping.
EXPERT TIP! 🤓
According to consumer group Which?, Income Protection is the one insurance product that every UK working adult should consider.
Not got enough time to read our guide, but want a quick expert overview of Income Protection? Our very own Ben Brooks, gives us the rundown on Income Protection and what to consider before buying a policy. Just hit play! 👇
As Income Protection cover is not limited to a set list of conditions and with many insurers having very few standard exclusions it is considered the most comprehensive form of incapacity insurance available.
It is designed to cover anything that medically prevents you from working, including accidents, bodily injuries and periods of sickness / illness.
The best Income Protection will cover you in your own occupation, meaning as long as you’re incapable of doing your specific job role you should be able to make a claim.
For more comprehensive salary protection, you may want to consider adding Unemployment Insurance to your policy. This will pay out if you lose your job through forced redundancy.
To qualify, you need to lose your job through no fault of your own. In such circumstances, you’ll receive a payout for either 12, 18 or 24 months depending on your policy or until you can find a new job, whichever is sooner.
Expert Tip :: You Might Be Better With Separate Unemployment Insurance
You can buy combined Income Protection with Unemployment Insurance – known as Accident, Sickness and Unemployment Insurance – but as the Unemployment Insurance is short-term, the Accident & Sickness Insurance element also tends to be short-term.
As such, we often recommend buying standalone, long-term Income Protection that will pay out until retirement if you can never work again rather than just for a few years.
Then, if Unemployment Insurance is appropriate and required, we tend to recommend buying it separately from the Income Protection to ensure fully comprehensive protection.
In general, there tends to be very few standard exclusions on Income Protection policies. However, this said, many providers limit claims resulting from:
What About Existing Health Conditions?
If you have existing health conditions it can make taking out Income Protection a little more complicated. When setting up your policy you will need to declare any existing medical conditions.
The insurer will review the medical information you provide and is likely to make one of three decisions.
If you have a pre-existing condition, it’s always best to speak to an independent expert such as one of the team at Drewberry. We have direct access to the underwriters at all the leading insurers which puts us in a great position to negotiate the best terms for you.
If you need help please don’t hesitate to pop us a call on 02084327333 or email help@drewberry.co.uk.
You might buy Income Protection for many reasons, from not receiving much (if any) sick pay from your employer to having little in the way of savings to fall back on should you find yourself out of work.
Whatever the reason, recent statistics have found that the risk of being out of work is much higher than many people might assume:
Our 2017 Wealth & Protection survey revealed:
Clearly, many people cannot afford to use their savings to cover their monthly bills if they stop earning.
In addition, Employment Support Allowance offers limited support starting as low as £73.10 per week if you’re over 25. While other state benefits are available, these depend on your circumstances and the nature of your disability and aren’t guaranteed.
When you consider that average weekly spending for UK households is more than £500, it’s unlikely that ESA alone would come even close to being able to support your lifestyle while you are not working. Even where other benefits are available, these may not top up your income back to the average household spending figure.
You can try our Income Riskometer to see how at risk your income is should something happen to you.
Simply answer 5 questions about your circumstances and it will calculate how safe your lifestyle is should you be unable to earn an income due to illness, injury or forced unemployment.
Having seen it first hand, I can’t emphasis enough the power of financial support in helping people get back on their feet.
For some people it can quite literally mean the difference between life and death.
Kevin Carr
CEO of Protection Review and Co-Chairman of the Income Protection Task Force (IPTF)
Unfortunately, some people wait to apply for protection insurance until they are at the point of realising that their health is at risk. However, by this point it’s almost too late to get cover as you’ll be potentially faced with higher premiums or exclusions on conditions you’ve already developed.
Instead, the best time to buy a policy is when you are young and healthy. The healthier you are when applying for a policy, the better deal you are likely to get. If you choose to guarantee your premiums, you can also keep the cost of your policy down across its lifespan.
There are certain lifestyle events where we tend to take on more responsibility and realise just how important it is to protect our salary should we suffer an illness or injury which renders us unable to earn a wage.
While standard Income Protection policies will be suitable for most people, the self employed, business owners and workers in certain occupations may require specialised cover.
For the self employed and company directors who run their own business there is no safety net of an employer which makes income protection even more important. With directors often paying themselves a small salary and the rest in dividends it is important to speak to an expert adviser to make sure you can take out cover where your dividends can be protected.
For the self employed making sure the amount of cover aligns with what gets declared to the HMRC ensures that you do not over insure yourself and pay for cover which you are unable to claim on.
For example, people who work for the NHS use a tiered sick pay system, where the length of time they have been employed determines how much sick pay they are entitled to. In addition, half of their sick pay entitlement consists of half payments, which may not be able to be sufficient to cover their necessary expenses.
To accommodate this, some insurers have put together specialised Income Protection for doctors. These policies allow doctors and surgeons to set their deferred period to match their full sick pay, yet the policy will pay out limited benefits when they begin receiving half sick pay to top up their income.
It can be confusing as to whether Income Protection or Critical Illness is the best option. The policies sound similar but actually work quite differently.
Income Protection, as mentioned, involves you paying regular premiums in exchange for a policy that will provide a regular monthly income if you’re medically unfit to do your job for any reason. The best Sickness Insurance will pay out right up until your retirement if you can never work again.
These regular payments help you manage all your essential monthly outgoings, from your mortgage / rent to your grocery shopping and utility bills.
Instead of a regular income Critical Illness Insurance will provide a single lump sum if you can’t work because of one of the insurer-specified ‘critical’ illness conditions listed in the policy.
The big three claims on Critical Illness Insurance are:
Different Critical Illness policies can cover anywhere from 10 to 150 serious illnesses. In addition to the big 3 detailed above you can expect multiple sclerosis, motor neurone disease, permanent loss of vision / hearing and other catastrophic illnesses / injuries to be covered.
The difference is that the condition has to be critical as defined by the insurer for Critical Illness Insurance, whereas with Income Protection the condition can be anything that stops you from working. This might include a bad back or stress, which is by no means critical but can be nonetheless debilitating.
Moreover, it can be hard to gauge how long you’ll be out of work with a particular illness, making it hard to know how long a lump sum from a Critical Illness Insurance policy would last. Income Protection, by paying you a regular income similar to a salary, eliminates this concern.
For more information on the key differences see our Income Protection vs Critical Illness Insurance Guide.
It is good to see yet more very interesting Drewberry research. I think it highlights the fact that we don’t have a hierarchy of needs in protection insurance and while we don’t products may be sold without the main focus being on customer need.
Critical Illness does a very important job but I believe Income Protection should outsell it by a significant margin.
Peter le Beau MBE FCII JP
Le Beau Visage and Seven Families Initiative
Payment Protection Insurance (PPI) and Income Protection are two totally separate protection products designed to do different things.
PPI is there to allow you to keep up with loan repayments if you can’t work due to accident, sickness or potentially unemployment. Mortgage Payment Protection Insurance, meanwhile, does the same for a mortgage.
Given the policy is usually tied to a loan repayment, you’re usually only able to insure that loan repayment. While the mortgage or loan may be covered, this leaves many other expenses not protected.
With Income Protection, you’re insuring a proportion of your salary against the risk of accident or sickness. This can include loan / mortgage repayments as well as other monthly costs.
Payment Protection Insurance may also have standard exclusions (such as no cover for back pain or mental health problems) and use a lesser definition of incapacity that could make it more difficult to make a successful claim.
For more information on the key differences see our Income Protection vs Payment Protection Guide.
If you are ill or injured in such a way that leaves you incapable of working and earning a salary, Income Protection Insurance will pay out a monthly benefit to cover a proportion of your income.
Unlike Critical Illness Cover, which only covers policyholders for serious health conditions on a predetermined list, Income Protection covers nearly every illness or injury that prevents you from doing your job resulting in a loss of income.
When taking out Income Protection, you have four major policy decisions to make. These will notably impact the price of the policy and form the core of any decent protection product.
There are three main types of premiums to concern yourself with when you take out Income Protection. These will also influence the price of your policy, although this influence will be felt more over time than immediately.
To ensure that your insurance benefits keep up with the rate of inflation, most insurers give you the option to index link your Income Protection policy.
This means that your insurer will annually assess changes to the Retail Price Index and adjust your benefits to match these changes. They’ll write to you every year to let you know and, if you agree to the increase in benefit, to compensate for the fact that you’ll be receiving a higher benefit your premium will also rise.
There are three definitions of incapacity that your policy might be written under, with each one impacting whether you can claim by determining the level of incapacity you need to suffer before you can receive benefits.
Own occupation protection allows you to receive a payout if you’re incapable of working in your specific job role. You won’t be asked to attempt another job if you can’t work. As such, this makes it arguably the best definition of incapacity.
So, for instance, a surgeon with a hand injury wouldn’t be able to perform surgeries and so would generally be able to make an Income Protection claim due to that injury.
With this definition of incapacity, you’ll only be able to make a successful claim if you can’t do either your job or another job that suits your skills, education and experience.
This may mean a surgeon with a hand injury couldn’t perform surgeries but may face not being able to make a successful claim because they have the skills and experience to teach medicine instead.
This is the most difficult definition of incapacity to claim on and in general we recommend most clients avoid it.
It means you can only make a successful claim if you become so disabled you can’t perform any job or perform a set number of tasks required by most professions, such as typing or signing your name. It requires almost total incapacity to make a successful claim.
Paying claims is the most important thing the protection industry does and there have been real developments recently in paying claims faster and making the claims process far easier for clients.
Some insurers can now even handle the claim over the telephone without having to send out a claim form. Should you ever need to claim we have a team on hand to support and make sure it is dealt with as smoothly as possible.
Neil is a client of Drewberry who took out an Income Protection policy with British Friendly. He’d had his policy for just 4 years before falling ill.
After experiencing a bout of stomach pains, Neil took himself to his GP who referred him on for further tests. These tests discovered that he unfortunately had bowel cancer, and it was already at stage 2.
Neil needed surgery to remove the cancer, but developed post-operative sepsis and had to spend several weeks in hospital recovering, completely unable to work.
British Friendly began paying him a proportion of his earnings after his deferral period, allowing him to keep up with all the important bills, such as his mortgage, which he was unwell.
🤕 Read More About Neil’s Claim
The table below shows how an Income Protection policy has saved five people financially following an illness which left them unable to work.
The information is from Liverpool Victoria’s claims history, it demonstrates how anyone can lose their income, regardless of age, gender or occupation, LV’s youngest claimant was just 22 years old.
Age at Claim | Occupation | Length of Claim (Ongoing) | Total Payout to Date |
|---|---|---|---|
31 | Carpet fitter | 15 years | £54,449 |
48 | Estate agent | 14 years | £805,695 |
43 | Accountant | 7 years | £255,520 |
48 | Quantity surveyor | 7 years | £207,296 |
49 | Physiotherapist | 3 years | £73,796 |
The vast majority of Income Protection providers now publish their claims statistics which is a real step forward in building trust.
Each year the Association of British Insurers (ABI) publishes average payout rate statistics from across all insurers. The latest figures are from 2017 and show that 87.2% of all Income Protection claims were paid, with over £600 million paid out in total.
Below is a table of the top 5 providers by their claims payout rate.
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Insurers
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2017
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Aegon
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96%
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Liverpool Victoria
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96%
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Shepherds Friendly
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96%
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Vitality Life
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96%
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Legal & General
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95%
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The cost of Income Protection won’t be the same for everyone. The pricing of your policy will be decided by a range of factors relating to your policy options and your personal circumstances.
As well as the above four policy factors, you’ll also need to consider the following three personal factors:
In the below table, we’ve laid out the average monthly cost of Accident and Sickness Cover as well as for Accident, Sickness and Unemployment Insurance.
To work out the cost of Income Protection, we’ve assumed:
The Income Protection quotes detailed below represent the cheapest policy that matches the above criteria from across the entire UK market.
Age | 🚭
| 🚬
|
|---|---|---|
Accident & Sickness Insurance | ||
Age 25 | £26.77 | £36.09 |
Age 35 | £39.13 | £49.58 |
Age 45 | £56.35 | £84.31 |
Accident, Sickness & Unemployment Insurance | ||
Age 25 | £68.47 | £77.79 |
Age 35 | £66.58 | £77.03 |
Age 45 | £100.60 | £128.56 |
No, traditional Income Protection by itself won’t cover redundancy / unemployment.
For that, you’d need either an Accident, Sickness and Unemployment (ASU) policy or Income Protection with a separate, standalone Unemployment Insurance ‘bolted on’.
We generally recommend the latter, as ASU policies tend to only pay out short-term if you’re ill or injured, which may not be long enough if you’re so ill you can never work again.
There are several key differences between Income Protection and Critical Illness Insurance, such as:
How soon you can claim on Income Protection depends on the length of the deferral period. You choose your preferred deferral period when you initially set-up your policy, the most common length deferred periods are listed below:
Should you be too ill to work your policy would start paying a benefit from the end of your deferred period. The longer your deferral period, the cheaper the monthly premiums.
If you can wait for 13 weeks before claiming Income Protection, perhaps relying on savings or other means to survive, then the policy will cost around half as much as one that pays out after 4 weeks.
Of course, if this would create financial difficulties for you, it’s senseless going for a longer deferral period to save money today only to struggle should you become ill in the future.
If you take out Income Protection as an individual, i.e. you pay the premiums from your own personal bank account if a claim arises there’s not typically any tax to be concerned with.
You’ve paid the premiums out of income that’s already had income tax deducted, so as a result the payout is tax-free.
The only difference would be in the case of Directors Income Protection, where the premiums are paid by the business as a business expense allowable against corporation tax.
In this instance, as no tax has been paid on the premiums, you have to pay tax on the payout, which is why it’s important to gross up the benefit from an Executive Income Protection policy.
Income Protection will cover any illness or injury that prevents you from working. Providing you take out own occupation cover, you’ll be covered if either accident or sickness prevents you from performing the duties of your specific job role.
According to data from The Exeter’s 2017 claims statistics nearly half of claims are made up of musculoskeletal issues and back pain, with a further 7% made up of mental health problems.
Things can get a little more complicated if you have a pre-existing medical condition. When setting up your policy you will need to declare any current medical conditions you may have, as well as anything that may be relevant over the past 5 years.
The insurer will review the medical information you provide and is likely to make one of three decisions:
It’s worth speaking to an expert if you have a pre-existing medical condition and need Income Protection as we can help ensure you get the most appropriate cover for you.
How long Income Protection lasts depends on the type of cover you take out.
Short-Term Income Protection will pay out for a maximum of 2 years per illness / injury per claim. If you’re still unable to work after this period, the payout will cease.
Long-Term Income Protection, on the other hand, will pay out for as long as you need it to. If you become so ill or injured you can never work again, the policy will continue to pay out right up until retirement age if you need it.
Yes, you can claim Income Protection more than once.
Policies last until the cease age you chose at the outset of the policy, usually aligned with your anticipated retirement age.
You could be off work for a year with a bad back, for instance, and then return to work once you’ve recovered. A few years down the line, you could develop another illness, such as cancer, and need further time off work. You’d be able to make a second claim in this instance.
With Long-Term Income Protection, you can make as many claims as you need to for as long as you need to over the life of the policy without affecting the premium you pay.
Policy Details & Additional Benefits |
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AIG is one of only a handful Income Protection providers to offer cover for individuals with type 2 diabetes. It is also willing to offer diabetics guaranteed premiums and will not exclude diabetes in its policy, unlike other providers.
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Aviva covers all policyholders with an own occupation definition of incapacity and, if you choose to return to work in a different occupation until you are well enough to return to your pre-incapacity occupation, Aviva will top up your reduced income with Back to Work Benefits.
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British Friendly gives access to its Mutual Benefits program, which provides rewards such as vouchers for high street shops, discounted fitness tracking devices, emotional support services and online legal services.
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Cirencester Friendly provides you with a range of additional benefits and services, including a hospitalisation benefit and a Friendly Voice service that provides you with a personal nurse that you can contact for advice and emotional support.
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The Exeter is one of the few UK insurers that is able to offer own occupation cover to workers in higher risk occupations, although such policies only offer age banded premiums.
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Legal & General offers a free life cover element that pays out a maximum of 12 times your monthly benefit if you pass away while the policy is in force.
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LV offers free access to unique LV Doctor Services, which include fast access to remote GP services, second opinion services and private prescriptions for policyholders and their children up to the age of 16.
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Royal London can include Fracture Cover, which pays out a lump sum of between £1,500 and £4,000 on top of any benefit you’d receive for being off work if you receive a fracture of a specified body part
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Shepherds Friendly allows you to apply to suspend cover and premium payments under your plan for a minimum continuous period of 3 months and up to a maximum continuous period of 24 months. This is known as ‘Career Break’ option.
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Vitality provides a unique offering. While the core of its policy is similar to other providers’ offering, it also offers a unique set of additional benefits to those who participate in the Wellness / Optimiser programs that can include policy discounts and rewards.
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We want to make sure you have all the necessary information and guidance so you are able to make the right financial decision when it comes to protecting you income.
We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to let us help.
Taking out Income Protection Insurance can be a bit of a minefield with a few important pitfalls to avoid.
If you need some help please do not hesitate to pop us a call on 02084327333 or email help@drewberry.co.uk.
Tom Conner
Director at Drewberry
