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Income protection is an insurance policy that pays a regular tax-free income if you are off work due to illness or injury. It is often considered alongside life insurance.
An income protection policy can help cover essential living costs such as the mortgage, rent and bills, reducing the financial strain until you are ready either to return to work or retire.
This article covers:
- What is income protection insurance?
- What are the different types of income protection?
- How much does income protection cost?
- What’s the difference between income protection and critical illness?
- Do I need income protection insurance?
- Income protection FAQs
This article contains affiliate links that can earn us revenue*
What is income protection insurance?
Income protection insurance provides a monthly replacement income, tax-free, if you are forced to stop work for any medical reason.
It can pay out for stress-related or mental health illnesses, as well as physical or sudden health conditions such as back pain, cancer or a stroke.
Income protection should give you the peace of mind that you have an alternative source of income to help ensure your bills will be paid if you are off work due to illness or injury. Policyholders are covered until retirement or their return to work, depending on the policy taken out.
Most people in the UK are eligible for up to 28 weeks’ statutory sick pay, funded by the government, if they are too ill to work.
But this is currently only £96.35 a week, which is why some form of personal insurance could be needed.
You might need income protection insurance if you:
- Are self-employed
- Are employed but your employer offers limited sickness benefits
- Have limited savings
- Have dependants or people relying on your income
- Are single and responsible for all household expenses
Be aware that payments don’t start straight away, but after an agreed period (often 4, 13 or 26 weeks).
Insurers also won’t cover your full salary, with typical payouts set at 50-70% of earnings. This is to incentivise you to return to work if you can.
Find out more: Do I need life insurance?
What is ‘index linked’ income protection?
This simply means the potential payout increases each year, to take into account higher costs of living and a higher salary as time goes on.
Most providers increase the potential payout in line with the retail price index (RPI) measure of inflation, or by a fixed percentage each year. The increase ranges between 1% and 5%, according to figures from insurer Royal London.
In comparison, a non index-linked policy will offer to pay out a certain amount per year – let’s say £12,000 – and this figure stays the same throughout the term of the policy.
The cost of an index-linked policy is higher to start with (when compared to a non-indexed policy) and will increase each year.
Find out more: Insurance for self-employed workers
What is ‘stepped benefit’ income protection?
A stepped-benefit policy takes into account whether your employer already offers sickness cover.
For example, your company may offer to pay your salary for three months in the event of illness or injury.
This is where a “stepped” insurance policy comes in: it pays lower amounts while you are receiving a salary from your employer, and increases payments when your company’s contributions reduce or stop.
What types of income protection insurance are there?
Income protection insurance is divided broadly into two categories
- Short-term policies of up to 12 or 18 months – although some insurers offer five years.
- Long-term policies – until you retire.
When searching for a policy, you may come across these terms:
Permanent health insurance
This is the technical name for income protection insurance, often used by insurers. It covers all forms of long-term income protection insurance.
Accident and sickness cover
This provides a replacement monthly income if you have to stop work due to injury or for health reasons. It can be taken out as a long-term or short-term policy.
Unemployment cover
This protects against potential redundancy, paying an income for the time you are out of work. It is only available as a short-term policy, typically up to 12 months.
Accident, sickness and unemployment
This is a combination of the above, covering all scenarios why you might be out of work. Policies are typically short-term and tend to pay out for up to two years.
There are differences between these:
- Permanent health insurance (PHI)
- Accident, sickness and unemployment cover (ASU)
The main difference is that PHI protects against long-term sickness or injury only, and will pay out until you retire. ASU tends to be taken out on a short-term basis, providing payments for up to two years, and it includes redundancy provisions.
Typically, you can make as many claims as required on a long-term PHI policy (as long as they are legitimate).
ASU policies only allow a single claim. The policy is cancelled after you claim. You will then have to take out a new one if you want to be covered again.
How much does income protection cost?
The cost of income protection insurance varies widely and will depend on factors such as:
- Your age
- Your occupation
- The percentage of income you would like to be covered
- Whether you want guaranteed or reviewable premiums. With guaranteed premiums, the monthly price remains the same. With reviewable premiums, the price may rise over time.
- The time set before payouts begin (the longer the “deferral period”, the lower the cost)
- The length of the policy
- Your current health
- Whether you are a smoker or have smoked in the past
- Any hobbies that could be hazardous – for example, hand gliding or off-piste skiing.
Example costs of income protection:*
Age: 32
Monthly cost: £33.24
Age: 42
Monthly cost: £60.44
Age: 52
Monthly cost: £84.89
*The above figures, provided by Drewberry Insurance, are the cheapest quotes available for someone in an office job who has no existing health conditions and doesn’t smoke. The policy assumes a deferral period of four weeks and offers a long-term income of £1,250 a month.
Is income protection insurance the same as PPI?
In short, no. Payment protection insurance (PPI) typically covers loan repayments (for example, a mortgage), whereas income protection can be used to fund broader living costs.
While the payout from an income protection policy can be used to cover mortgage repayments, it can also pay for food, bills and any other household expenses.
PPI policies also tend to be short-term, up to 24 months, whereas income protection can pay out for a much longer time.
Find out more: How critical illness insurance works
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What is the difference between income protection insurance and critical illness cover?
You can find out more about the differences in this article. But briefly:
Payout
Critical illness: This insurance pays a one-off lump sum. There is no deferral with critical illness, and payment would be on diagnosis of a listed condition.
Income protection: This provides regular payments if you are unable to work, after a deferral period of at least four weeks.
What’s covered
Critical illness: It tends to just cover potentially life-threatening illnesses. These are specified when you take out the insurance, and policies tend to include about 50 conditions.
Income protection: This will cover anything that means you are medically signed-off from working.
How long cover lasts
Critical illness: Only pays out once, after which the policy ends.
Income protection: You can make multiple claims during the policy term.
Find out more: Critical illness cover vs. income protection insurance
Do I need income protection insurance?
In summary, you may want to consider income protection insurance if you are concerned about paying the bills should you have to stop work for any health-related reason.
Think carefully, though, about which type of cover you need. Life insurance is the most popular form of personal protection insurance. It is held by 24% of UK adults, according to the investment firm Schroders Personal Wealth.
Life cover only pays out on death, providing a lump sum or regular payments to dependants.
On the other hand, income protection and critical illness cover only pay out for illness or injury, not death. Income protection is estimated to be held by 7% of UK adults, and critical illness by 10%, according to Schroders.
Income protection is likely to be the most expensive option, but it is also the most comprehensive and can cover you for a wider range of circumstances.
A comparison website could help determine the best income protection insurance for you.
Or use this tool below to get help finding a suitable income protection policy.
Income Protection, sorted
- Get free, independent advice online
- Suitable quotes from the whole market of insurers
- And help applying for cover, when you’re ready
Income protection insurance FAQs
How has Covid-19 affected income protection policies?
Generally, insurers are paying out to existing customers who become incapacitated or seriously ill as a result of the coronavirus, leaving them unable to work.
It is unlikely that insurers will cover you for self-isolation or a reduction of income if on furlough, but check the policy wording.
Can I have more than one income protection policy?
Theoretically, yes. But there may be little point in having more than one as the overall payout cannot exceed a certain percentage of your gross salary.
So if you have two policies each offering to cover 50% of your salary, you are not allowed to combine them to get to 100%; in the event of a claim, an insurer will ask if you have any continuing income – including from another insurance payout – and reduce the level of cover accordingly.
Will income protection cover my mortgage?
Yes, it can. Payouts can be spent however you like. If you are just looking for a product to cover the mortgage, then mortgage protection insurance could be a cheaper alternative.
Can I get income protection if I am self-employed?
Yes, income protection insurance covers both employed and self-employed workers.
How much of my income will it cover?
Up to 70%, but closer to 50% is more typical.
Does it pay out if I lose my job?
Potentially, but only if you have chosen to include redundancy cover in your policy.
For how long will income protection cover me if I am out of work?
It depends on the length of the policy, but it can cover you until retirement age.
Does income protection insurance pay out if I die?
No. If you want dependants to receive financial support in the event of death, then life insurance should be considered. But you could hold both life insurance and income protection policies.
Find out more: Guide to family life insurance
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