What is income protection insurance?
Income protection insurance (sometimes known as permanent health insurance) is a long-term insurance policy designed to help you if you can not work because you are ill or injured.
It ensures you continue to receive a regular income until you retire or are able to return to work.
- It replaces part of your income – if you can not work because you become ill or disabled.
It pays out until you can start working again – or until you retire, die or the end of the policy term – whichever is sooner.
- There is often a waiting period before the payments start – you generally set payments to start after your sick pay ends, or after any other insurance stops covering you. The longer you wait, the lower the monthly premiums.
- It 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).
- You can claim as many times as you need to – while the policy lasts.
With income protection insurance, everything depends on getting the right policy – so it is best to get advice from an independent financial adviser or broker.
It is not the same as critical illness insurance, which pays out a one-off lump sum if you have a specific serious illness.
It is not the same as short-term income protection, which also pays out a monthly sum related to your income, but only for a limited period of time (normally between two and five years) and can cover fewer illnesses or situations.
Do you need it?
According to the ABI, one million workers a year find themselves unable to work due to a serious illness or injury. It does not matter whether or not you have children or other dependants – if illness would mean you could not pay the bills, you should consider income protection insurance. You are most likely to need it if you are self-employed or employed and you do not have sick pay to fall back on. Check what your employer will provide for you if you are off sick.
Who doesn’t need it?
You might not need income protection insurance if:
- You could get by on your sick pay. For example if you have an employee benefits package which gives you an income for 12 months or more.
- You could survive on government benefits. But they might not be enough to cover all your outgoings.
- You have enough savings to support yourself. Remember that your savings might need to see you through a long period.
- You could take early retirement. If you are near retirement age, perhaps you could afford to retire early. If you are unable to return to work you might be entitled to take your pension early.
- Your partner or family would support you. Perhaps your partner has enough income to cover everything the two of you need.
How much does income protection insurance cost?
How much you pay each month will depend on the policy and your circumstances. Usually income protection insurance covers a wide range of illnesses and situations and has the potential to pay out for many years.
The cost of a policy will vary based on a number of factors, including:
- Whether you smoke or have previously smoked
- The percentage of income you’d like to cover
- The waiting period before the policy pays out
- The range of illnesses and injuries covered
- Health (your current health, your weight, your family medical history).