Income protection insurance: what it covers and who needs it

Income protection insurance pays out a regular monthly income if you cannot work due to illness or injury. The key features are: deferred period — the time between becoming unable to work and payments starting, typically 4, 13, or 52 weeks; benefit amount — typically 50-70% of your gross annual income; payment duration — either until you return to work, reach retirement age, or a specified period; and premium — based on your age, occupation, health, and chosen deferred period. The longer the deferred period, the lower your premium. For employees with good employer sick pay, a 52-week deferred period may be appropriate. For self-employed people with no sick pay, a 4-week deferred period is usually advisable.

Income protection typically covers inability to work due to illness or injury — whether physical or mental health conditions — for as long as the policy pays out. It does not cover: unemployment (this is a different type of insurance); self-inflicted injuries within the first year; pre-existing medical conditions (unless declared and accepted by the insurer); and redundancy. Some policies cover specific conditions only for a limited period (for example, mental health conditions for 12 months), which has been a criticism of the industry. Read the policy carefully to understand what is and is not covered, particularly regarding mental health — which accounts for a significant proportion of income protection claims. Occupational policies (arranged through your employer) may have different terms to individual policies.

Income protection is most important for: self-employed individuals with no employer sick pay; employees in jobs with no enhanced sick pay beyond SSP; sole breadwinners in households with no savings to cover 3-6 months of expenses; anyone with financial commitments that cannot be met on SSP (£123.25/week); and people with pre-existing health conditions who may find it harder to get cover later. It is less necessary for: employees with comprehensive employer sick pay schemes (check your employment contract); those with substantial savings covering 6+ months of expenses; and high earners who could self-insure. Many people confuse income protection with life insurance — they serve different purposes: income protection pays out while you are alive but cannot work; life insurance pays out on death.