What is income protection insurance?

A lot of people would find it challenging to manage their necessary expenses like mortgage and rent if they were to lose their income because of illness or an accident. Income protection is an insurance plan that provides a steady income until retirement or until you can go back to work.

How does income protection insurance work?

Income protection insurance:

• provides regular payments that replace part of your income if you’re unable to work due to illness or an accident

• pays out until you can start working again – or until you retire, die or reach the end of the policy term – whichever is sooner

• typically pays out between 50% and 65% of your income if you’re unable to work

• covers most illnesses that leave you unable to work – either in the short or long term (depending on the type of policy and its definition of incapacity)

• can be claimed as many times as you need to while the policy lasts.

There’s often a pre-agreed waiting (‘deferred’) period before the payments start. The most common waiting periods are 4, 13, 26 weeks and a year. The longer you wait, the lower the monthly premiums.

It’s not the same as critical illness insurance, which pays out a one-off lump sum if you have a specific serious illness.

When do you need income protection insurance?

If we are unable to work due to illness or an accident, it is common to expect that our employer will continue to provide some form of income support.

However, the reality is that employees are typically transitioned to Statutory Sick Pay within six months, with few employers offering support beyond a year for sick leave. It is important to understand what provisions your employer has in place for sick leave.

With limited savings, the loss of income can quickly lead to difficulties in meeting essential household expenses, such as rent, mortgage, and utilities.

This situation can be particularly challenging for self-employed individuals who do not have sick pay benefits to rely on.