If you were unable to work for months, or in some cases years, because of illness or injury, how long would your finances hold up? For most people, statutory sick pay of £116.75 a week does not go very far, employer sick pay often ends after a few months, and savings run out faster than expected. Income protection insurance is designed for exactly that gap.
This guide walks through how income protection works, who tends to benefit most, what it does and does not cover, how the payout is calculated, and when the best time to take it out actually is.
How does income protection work?
Income protection does roughly what the name suggests. It provides a monthly payment if you are unable to work due to injury or illness, and it keeps paying until you either return to work or the plan ends.
It is ongoing cover rather than a one-off payout, which means that if you are signed off long term, the payments continue month after month rather than stopping at a single lump sum. That structure is what makes it different from most other forms of personal insurance.
Who should consider income protection?
The honest answer is anyone who relies on their income to pay their bills or maintain their lifestyle.
It is particularly valuable for people who would struggle financially if their salary stopped for an extended period and who do not have family support or significant savings to fall back on. That includes people with children, people with sizeable mortgages, and people with other regular financial commitments.
Self-employed people are the group with the strongest case for cover. There is no employer sick pay, and the day the work stops is usually the day the income stops. Anyone with limited employer support (which is most people once you look at how quickly enhanced sick pay tapers off) is in a similar position.
What are the benefits of income protection?
The main benefit is financial security. If you are unable to work due to ill health, an income continues to arrive, and it can be used to cover the essentials: mortgage payments, rent, household bills, food, and everything else that keeps a household running.
There are a few other benefits worth being aware of:
- It covers a wide range of conditions, physical and mental health, which is fairly unique to income protection compared with other insurance products.
- It can pay out until the end of the plan. Many people set the cover to run to their planned retirement age, so if the worst happened and someone was unable to work again, the plan could pay out for years. Very few other personal insurance products work this way.
- Peace of mind for you and your family, particularly if you have dependents.
- Value added services from many providers, such as remote GP access, rehabilitation support, counselling, physio and wellbeing services. These vary by provider, and are often more useful than people expect.
What are the disadvantages of income protection?
There are a few things to be aware of before you take out cover:
- It does not replace your entire salary. Most policies cover around 50 to 70% of your gross income, with many providers capping at 60 to 65%. Payouts are tax-free, so the actual amount you receive can feel closer to your normal take-home pay than the headline percentage suggests, but it is not a full replacement.
- There is a waiting period. Known as the deferred period, this is the length of time you need to be off work before payments start. During this window you are typically relying on employer sick pay, savings, or another source.
- Payments are monthly, not a lump sum. If you were diagnosed with a serious illness such as cancer, income protection would provide a monthly income once the deferred period had ended, but not the immediate cash injection that a critical illness policy would give you. That is a real trade-off, and for some people the answer is to have both types of cover.
- Plans that are not set up correctly can be poor value. Deferred periods that are too long, cover that does not reflect actual take-home need, or plans that were set up years ago and never reviewed can end up costing money without providing meaningful protection. It is worth reviewing income protection every 18 to 24 months to make sure it still fits your situation.
What does income protection cover?
The short answer is any condition that prevents you from doing your occupation and that a doctor is willing to sign you off for.
Common examples include:
- Cancer, heart attack, stroke and other serious illnesses
- Musculoskeletal conditions such as back injuries and joint problems
- Mental health conditions such as depression and anxiety, if you are signed off work
- Serious injuries from accidents
It is not restricted to a set list of conditions. If you cannot do your job and a doctor certifies you as unfit to work, income protection is designed to respond.
What doesn’t income protection cover?
The biggest misconception about income protection is that it covers redundancy or unemployment. It does not. Income protection is purely health-based cover. Losing your job for reasons unrelated to your health sits outside what the policy is designed to do. There are separate products (accident, sickness and unemployment cover being one) that address that, but they are a different category of insurance and work differently.
The other main things not covered are:
- Pre-existing health conditions where an exclusion has been applied. If, for example, you have a history of back pain and have been seeing a physio, the insurer may exclude back-related claims. That is why arranging cover before you develop long-term aches, pains or conditions usually results in better cover as well as lower premiums.
- Anything you have not disclosed on the application. Insurers assess your medical history at the point of claim, and if something material was not disclosed, they may have grounds to decline. Full disclosure at the outset is the single most important thing you can do to protect your ability to claim.
How do insurers work out how much to pay you?
When you take out a policy, you tell the insurer what your salary is, and you agree with them how much you will receive per month if you claim. The maximum tends to fall within the 50 to 70% of gross income range, with different providers capping at slightly different levels.
You can choose to cover less than the maximum if you prefer a lower premium or if the maximum feels like more than you need. The agreed monthly amount is written into the policy terms and is what you would receive if you claimed, subject to the deferred period and the policy conditions.
At the point of claim, the insurer will typically ask for evidence of your employment and income (payslips and a P60 for employees, or tax returns for the self-employed) to confirm the position. Payments are then made monthly, tax-free.
What is a deferred period?
The deferred period is the amount of time you agree to wait between becoming unable to work and the point at which the policy starts paying you. It is sometimes called the waiting period or excess period.
Common options are 4 weeks, 8 weeks, 13 weeks (three months), 26 weeks (six months) and 52 weeks (twelve months). The most commonly chosen periods are 4 weeks and 13 weeks, but the right choice depends on your circumstances.
The general rule is that the longer the deferred period, the lower the monthly premium, because you are absorbing more of the initial risk yourself. The most sensible way to choose is to align the deferred period with your existing safety nets:
- Self-employed with no sick pay? A shorter deferred period (4 or 8 weeks) is usually the sensible choice, because your income stops immediately when you cannot work.
- Employed with a few months of full sick pay? A deferred period that lines up with when your sick pay drops or ends often works well.
- NHS or public sector, with generous sick pay? A longer deferred period (often 26 weeks) can significantly reduce the premium while still leaving you covered for the point at which sick pay tapers.
Some UK providers can specifically dovetail the cover with NHS sick pay structure (typically six months full pay followed by six months half pay), topping up the difference when the pay drops to half.
What factors influence the monthly premium?
The main factors are:
- Your age
- Your occupation
- Your health and medical history
- Whether you smoke or have smoked
- Your income and the amount of cover you are arranging
- The deferred period you choose
- Whether you add options such as index linking (which increases the cover in line with inflation)
As a general rule, if you are young and healthy the premium is lower, and once set, the premium does not automatically change through the term unless you add options like index linking that adjust it.
Full-term vs short-term income protection plans
Two broad types of plan exist in the UK market:
- Full-term income protection. If you claim, the plan can pay until you return to work, the plan ends, or you reach a set age (often your planned retirement age). This is the more comprehensive option and it is priced accordingly.
- Short-term income protection. These cap the payout duration at 1, 2 or 5 years per claim. If you were signed off work long term, the payments would stop at the end of the capped period even if you were still unable to work. These plans are cheaper, which makes them a useful option when budget is a real constraint.
The right choice depends on your circumstances and what you are trying to insure against. A conversation with an adviser will run the numbers on both.
Which professions benefit most from income protection?
Income protection can benefit almost anyone who works for a living. Cancer Research UK’s headline figure is that one in two people in the UK will be diagnosed with cancer at some point in their lifetime, and long-term absence from work does not distinguish by profession.
That said, a few professions have a particularly strong case:
- Self-employed people. No employer sick pay, income stops the day the work stops.
- Tradespeople and manual workers. Roles that rely on physical ability carry a higher risk of injury putting you out of work for extended periods.
- Healthcare professionals. Doctors, nurses and care workers spend their working lives around unwell people, and some UK providers offer income protection products specifically designed to work around NHS sick pay.
When is the best time to arrange income protection?
The best time is before you need it, and that generally means as young and healthy as possible.
There are two reasons. First, premiums are typically lower when you are younger and healthier. Second, you have more options, more providers will consider you, and you will pick up fewer exclusions. Once a health issue has occurred, the same cover often becomes considerably more expensive or comes with exclusions that would not have applied before.
A lot of people think about protection only after a health scare, either their own or someone close to them. By then, the cover available is usually more limited and more expensive than it would have been earlier. If income protection is on the “I should probably look at this” list, the earlier that becomes an actual conversation, the better the outcome tends to be.
Why clients choose Heron Financial for income protection
Heron Financial is a B Corp certified, whole of market mortgage and protection broker. We arrange income protection for employed clients, self-employed clients, tradespeople, healthcare professionals and everyone in between, matching the deferred period, cover amount and product type to the existing sick pay, savings and household situation. We also review protection every 18 to 24 months, because a policy that fits your life today may not fit it three years from now. It is all fee-free.
FAQs
What is income protection insurance?
Income protection is a long-term insurance policy that pays a monthly income if you are unable to work due to illness or injury. Payments continue until you return to work, the plan ends, or you reach a set age.
How much of my salary does income protection cover?
Typically 50 to 70% of your gross income, with many providers capping at around 60 to 65%. Payouts are tax-free, which usually brings the amount received closer to your normal take-home pay than the headline percentage suggests.
Does income protection cover redundancy or unemployment?
No. Income protection is purely health-based cover. Redundancy and unemployment are not included, though separate products (accident, sickness and unemployment cover) exist for that category of risk.
Does income protection cover your own job or any job?
It depends on the type of cover. Most modern UK income protection policies are set up on an own occupation basis, meaning the policy pays out if you cannot do your specific job. Some cheaper policies work on a suited occupation or any occupation basis, which are harder to claim on. This is something an adviser will help you set correctly.
Does income protection pay out for mental health conditions?
Yes, if you are signed off work by a doctor. Mental health conditions such as depression and anxiety are one of the most common causes of workplace absence in the UK, and they are covered on standard income protection policies.
What is the difference between income protection and critical illness cover?
Income protection pays a monthly income for as long as you are unable to work due to illness or injury. Critical illness cover pays a one-off lump sum if you are diagnosed with a specific serious condition listed in the policy. They cover different risks and are often used alongside each other rather than as alternatives.
When is the best time to take out income protection?
The earlier the better. Premiums are typically lower when you are young and healthy, more providers will consider you, and fewer exclusions apply. Cover taken out after a health issue often becomes more expensive or comes with exclusions that would not have applied earlier.