Income protection insurance replaces a portion of your income if you’re unable to work due to illness or injury.
How It Works
| Feature | Typical Amount |
|---|
| Income replacement | 50-70% of gross income |
| Payment term | Until retirement, or fixed term (1-5 years) |
| Deferred period | 1-12 months (before payments start) |
| Premium | 1-5% of income |
| Tax on payments | Taxable (received as income) |
What It Covers
| Covered | Not Covered |
|---|
| Long-term illness | Pre-existing conditions (usually) |
| Accidents | Self-inflicted injuries |
| Mental health conditions | Unapproved activities |
| Back problems | Redundancy (separate insurance) |
| Cancer | Pregnancy (usually first 3 months) |
| Heart conditions | Elective surgery |
Deferred Period
| Deferred Period | Monthly Premium | When Payments Start |
|---|
| 1 month | Highest | After 1 month off work |
| 3 months | Moderate | After 3 months |
| 6 months | Lower | After 6 months |
| 12 months | Lowest | After 12 months |
Choose a deferred period that matches your savings. If you have 6 months of emergency fund, choose a 6-month deferred period.
Payment Term Options
| Term | Description | Best For |
|---|
| Short-term (1-2 years) | Low premium, limited cover | Basic protection |
| Long-term (5 years) | Moderate premium, decent cover | Most people |
| To retirement (age 68) | Higher premium, full cover | Comprehensive cover |
Who Needs Income Protection
| Occupation | Risk Level | Need |
|---|
| Construction worker | High | Essential |
| Self-employed | High | Essential |
| Office worker | Low-Medium | Recommended |
| Public sector | Low (sick pay) | Optional |
| NHS/teacher | Low (generous sick pay) | Less urgent |
Cost Factors
| Factor | Effect on Premium |
|---|
| Age | Higher with age |
| Health | Pre-existing = higher or excluded |
| Occupation | Riskier = higher |
| Smoking | Higher |
| Deferred period | Longer = lower |
| Payment term | Longer = higher |
| Amount of cover | More = higher |
Income Protection vs Other Products
| Product | What It Covers | Duration |
|---|
| Income Protection | Illness or injury stopping work | Long-term |
| Critical Illness Cover | Specific illnesses (one-off payout) | Single lump sum |
| Accident & Sickness | Short-term illness/accident | 12-24 months |
| Life Insurance | Death | Remainder of term |
Bottom Line
Income protection insurance is essential if you don’t have significant savings or generous sick pay. It pays 50-70% of your income if you can’t work due to illness or injury. Choose a deferred period that matches your emergency fund. The longer the deferred period, the lower the premium. Self-employed people should prioritise this cover.
This content is for educational purposes only. Not financial advice. Do your own research before investing.