Keeping on top of essential outgoings – like mortgages and rent – would be tough on most of us if we were to lose our income due to illness or injury. Understanding the options available could make all the difference, including what Income Protection is and how it could help you.
In this guide, we’ve outlined how it works, when you need it, how much you need and what you’ll need to consider before taking out a policy.
What is Income Protection?
Income Protection is a type of insurance policy. It’s designed to cover your earnings if you’re unable to work due to unforeseen circumstances, such as illness or injury.
For many, taking out an insurance policy offers invaluable peace of mind. Consider it your ‘safety net’, as it’ll pay you a tax-free income until you retire, the end of the policy term or when you return to work (whichever comes first).
This means you can rest easy knowing that your home and lifestyle would be safe, should you ever be unable to work.
Before taking out cover, you should consider the following:
- How much you’d like to receive monthly (this is usually capped based on your average earnings).
- The deferral period (the time between being unable to work and your first payment).
- The cover term (how many years you’d like to be covered for).
- The payment period (how long you’d like to receive monthly payments through your insurance).
How much Income Protection do you need?
Normally, you’ll be able to cover up to 80% of your net salary as a tax-free income. When gathering your quotes, consider how much you’d need to cover your essential costs – i.e. mortgage payments, bills and living expenses.
It’s vital that you don’t underestimate the amount of Income Protection you’ll need just to lower your premium. You also cannot insure yourself for more than your salary.
Who should get Income Protection?
This depends on your individual circumstances. If losing your income for health reasons would cause you significant financial hardship then it could be a very worthwhile investment. For example, if you’re the breadwinner in the family and being unable to work would put your home at risk.
Eligibility for cover can vary based on insurers, but generally, you’ll need to be employed at least 20 hours per week and have been in the same job for at least a year.
Who doesn’t need it?
Whilst having cover will certainly give you peace of mind, not everyone will need to take out a policy. You may not need to take out Income Protection if any of the following circumstances apply to you:
- Essential outgoings would be covered by statutory sick pay.
- You’re able to survive on government benefits.
- You have enough personal savings to support yourself.
- You’re in a position to take early retirement.
- Your partner or family can support you.
When do you need Income Protection?
You can claim on your policy as soon as you’re unable to work due to illness or an accident. However, the policy does need to be in place before you find yourself unable to work. For example, you couldn’t take out Income Protection after you’ve had an accident and start claiming right away.
What does Income Protection cover?
Income Protection will pay out a tax-free income if you are unable to work due to any kind of illness or injury. Regardless of whether the illness or injury is short-term or long-term, your policy would still pay out a monthly sum based on your annual earnings in the 12 months before your illness or injury.
Does it cover redundancy?
Most Income Protection policies don’t cover redundancy. However, there are other products available that do protect your income against redundancy. These are commonly referred to as ‘Redundancy Insurance’ or ‘Unemployment Insurance’.
Note that you can only insure yourself against involuntary redundancy. If you chose to take a redundancy package, resign or sell your business then you wouldn’t be insured.
Can you claim Income Protection while on sick leave?
Yes, you can claim Income Protection while on sick leave. Most policies don’t interfere with your entitlement to sick pay and will simply start to payout once your employer stops paying it to you.
Can you get self-employed Income Protection?
Absolutely! Those who’re self-employed will find it quite beneficial. Freelancers and business owners don’t usually have access to the sick pay that comes with being employed by a business. By taking out cover, you could receive a payout of up to 80% of your average income each month.
What counts as self-employed?
To be eligible, you must be self-employed either as a Sole Trader, Limited Company director or be in a Partnership.
Income Protection vs Critical Illness – which is best?
It’s difficult to compare Income Protection and Critical Illness as they’re two very different types of insurance. Generally, you’re more likely to claim on an Income Protection policy, here’s why:
- Income Protection pays out a monthly income regardless of what the injury or illness is. The only condition is that you’re unable to work due to illness or injury. However, the amount paid out is likely less than that of a successful Critical Illness claim.
- Critical Illness will pay out a lump sum following a successful claim, giving you an instant cash boost. However, policies will only cover certain illnesses. This means that even if you’re unable to work, you won’t be able to claim if your illness doesn’t fit the criteria.
Where can I get an Income Protection quote?
Interested in taking out cover, but unsure about what to do next? We can help! You can book a free, no-obligation appointment with an advisor who will talk you through your options. Get in touch on 0345 1645790 or via our online contact form.
Alternatively, you can find a competitive Income Protection quote using our handy online comparison tool.