What is income protection insurance?

This content was reviewed and approved by Phil Briars.

How does income protection insurance work?

Income protection insurance is a type of insurance policy that provides you with a regular replacement income payment if you’re unable to work due to illness or an accident/injury.

Between you not being able to work and starting to receive your payments, there is a phase called the waiting or deferred period. Waiting periods will change from provider to provider, so it's important to know how long you will have to wait before you start receiving payments from your income protection policy. Most people will set their policy’s waiting period to match the end of any sick pay they receive from work, or how much of their savings they are prepared to use up. For example, a 3-month waiting period to match the end of receiving 3 months sick pay from work.

Once this waiting period has passed, and if your claim is approved, you’ll start receiving the chosen amount of your payment, which is normally up to around 60% of your current income before tax. This lasts until the first of either you’re able to return to work, the policy ends, you die, or enter retirement.

Why would you need income protection insurance?

Income protection insurance offers you financial reassurance if you’re signed off work for longer than any sick pay you receive. Statutory Sick Pay (SSP) isn’t usually enough to cover your bills. As SSP is set at £118.75 per week for up to 28 weeks (as at April 2024), this won’t often cover the essentials such as food, bills, and your mortgage or rent payments.

Income protection can help bridge this gap and provide you with a source of income. It will help you to pay your bills and mortgage payments, whether you are employed or self-employed.

This is different from critical illness cover with your life insurance. Critical illness insurance pays out a lump sum when you are diagnosed with one of a specific list of life-changing illnesses, whereas income protection pays out regular amounts for a much wider range of illnesses or injuries until you are able to return to work.

What does income protection insurance include?

Income protection insurance’s primary feature is a tax-free monthly payment to help replace your income, paid to you after your chosen waiting period. The payments will usually be up to 50-60% of the income (before tax,) that you received before your injury or illness.

The full range of benefits may differ from provider to provider. 

What to know before taking out income protection

Income protection policies vary from provider to provider. It’s important that you understand what your chosen provider offers before taking out income protection.

What income protection covers

• Being unable to work due to illness or injury that lasts longer than your chosen waiting period.
• A wide range of illness and injury.

What income protection won’t cover

• Pre-existing medical conditions might not be covered. You should check the policy conditions to see what will and won’t be covered.
• Some policies don't allow claims if you can do other types of work but can't perform your own job. Check your policy to understand if you're still covered, if you’re capable of doing other work.
• If you are unemployed but able to do basic household tasks.
• If you’re ill, but continue to work.
• Any illness or injury that lasts less time than your chosen waiting period.

How much you’ll be paid

Income protection is usually based on your income in the previous 12 months before your claim. Most policies will pay an ongoing, regular amount of up to 60% of your monthly income before tax. Different insurers have different percentages of income they will cover up to. For example if you earn £30,000 a year, that’s £2,500 each month before tax. Using 60% cover that means the most you would be paid is £1,500 each month, tax- free.

If you are self-employed, or your income fluctuates due to being in a commission-based role, for example, then you may be able to use the average of your previous 36 months of income instead, to help work out what your payout should be. Not every insurer offers this, and you may have to request this at the point of claim.

How much does income protection insurance cost?

As with many insurance policies, the amount you pay in monthly premiums is personalised to your circumstances. Costs can vary over time as your circumstances and requirements change and it’s important to be honest with your insurance provider, so you get the most suitable cover.

Factors affecting the cost

The cost of income protection will vary depending on the following factors:

• your age
• the job(s) you do (riskier jobs may cost more to cover, or not be covered at all)
• whether you smoke or have smoked
• the percentage of your income (before tax) you’d like to cover
• the waiting period you choose until the policy pays out
• the range of illnesses and injuries covered by your chosen provider
• your current health
• family medical history.

What income protection policy types are there?

There are different types of income protection that offer a variety of options that you can choose to suit your needs and financial circumstances best.

Types of cover

Level cover

Level cover fixes your chosen cover amount when the policy begins, without any increases for inflation. This means it will have less purchasing power in the future.

Inflation linked, or increasing cover

Inflation-linked cover increases each year with the aim of reducing the impact of inflation. Insurance companies tend to use the Retail or Consumer Prices Indexes (RPI or CPI) when setting how much they will increase by each year. Monthly premiums will also go up (how much by depends on each provider). Some providers also allow you to set a fixed percentage of increase each year, for example a figure between 0% and 8.5%. 

Types of monthly premium

Guaranteed premiums

Your premium is guaranteed. This means it will not change throughout your chosen policy term, unless you have chosen inflation-linked cover. 

Reviewable premiums

Reviewable premiums may not change for the first 5 years of your policy, but after that, they could change every year depending on the provider you have chosen. Reviewable premiums may increase or decrease during the term of the policy. 

Other things to think about

Budget cover

With budget cover, typically the claim payment period is limited to 12 or 24 months per claim (depending on the option chosen) but multiple claims can still be made during the term of the policy, although different providers may vary. The cost of this type of cover is usually less than full cover that would pay you until retirement, if needed.

Waiting periods

The waiting periods you can choose are commonly 1, 2, 3, 6, or 12 months, although different providers may vary. Most providers will offer a choice of these to suit your circumstances.

Additional cover

Depending on the insurance provider, Income Protection policies can also have additional types of cover added on. It’s worth checking to see what a provider offers. Items can include fracture cover, death benefit, cover guarantees for certain professions, rehabilitation services to help you recover more quickly, and payment holidays in the event of unemployment.

Are income protection and PPI (Payment Protection Insurance) the same?

Income Protection and Payment Protection Insurance (PPI) are not the same. While Income Protection replaces a portion of your income during illness or injury, PPI specifically covers debt repayments, such as credit cards or personal loans.

Are you looking for income protection insurance?

LV= offer income protection insurance for a variety of people, and include specialist cover for doctors and surgeons, or teachers.

Why not request a callback with our chosen partner, LifeSearch, to see how we could help you if you were off sick?

*Wealth and Wellbeing Research Programme, June 2024