What is Income Protection Insurance?
Most of us rely on our income to cover the essentials, from mortgage or rent payments through to utility bills, food shopping and family activities. For many households, that monthly salary is the cornerstone of financial stability. But what would happen if illness or injury forced you to stop working for several months, or even longer? The sudden loss of income can quickly create stress and financial pressure.
This is where income protection insurance can make a difference. It is designed to step in when your earnings stop, offering a regular replacement income so you can continue meeting your commitments without running down savings or falling into debt.
In this guide we look more closely at what income protection is, how it works in practice, who might benefit most from it, and why it can be an essential part of a long-term financial plan.
Understanding Income Protection Insurance
Income protection is a type of insurance designed to replace part of your income if you are unable to work due to illness or injury. Unlike critical illness cover, which pays out a lump sum, income protection provides a regular monthly payment until you are able to return to work, retire, or reach the end of the policy term.
The idea is simple: if your income stops, this cover helps make sure your financial commitments do not.
How Does Income Protection Work?
You choose the level of cover and the term of the policy.
If you are signed off work by a medical professional, the insurer pays you a percentage of your salary each month.
Payments continue until you are well enough to return, or until the policy ends.
Policies usually cover a wide range of illnesses and injuries, including stress and mental health conditions.
There is usually a waiting or “deferred” period that you have to be off work before you can claim on the policy.
Most policies will pay between 50% and 70% of your gross income. While it does not replace every penny, it is often enough to keep your household running and cover essential costs.
Who Needs Income Protection?
Many people assume that sick pay from their employer will be enough to see them through. In reality, Statutory Sick Pay is limited both in amount and duration, and often only lasts for a matter of weeks. Employer sick pay packages can differ greatly, with some offering generous cover and others providing very little. Not everyone is entitled to long-term financial support through their job.
This is why income protection can be so valuable. It ensures a steady replacement income when workplace benefits fall short. It could be especially important if you:
Are self-employed and have no access to sick pay at all.
Have a partner, children or other dependents who rely on your income.
Are managing a mortgage, rent, or other fixed monthly financial commitments.
Work in a role where even a short period of illness or injury could prevent you from fulfilling your duties.
Want peace of mind that your lifestyle and long-term financial plans remain on track even if your income is interrupted.
Benefits of Income Protection
Peace of mind – knowing you will still have money coming in if you cannot work.
Flexibility – policies can be tailored to your budget and circumstances.
Wide cover – many policies cover a broad range of conditions, including mental health.
Long-term support – unlike some insurances that only pay out once, income protection can continue paying for months or even years. The policy can be set up to run to a set age i.e. maybe your anticipated retirement age. If you are to ill to work again the policy will continue to payout until this age.
Common Misconceptions
“It will cost too much.” Premiums depend on factors such as age, health, job type, deferred period and how long you want the cover to last. There are options to suit different budgets.
“I will never need it.” Accidents and illnesses can affect anyone. Income protection is about preparing for the unexpected.
“I have savings.” Savings can be a buffer, but they can disappear quickly if you are off work for a long time. Insurance provides sustainable support.
Choosing the Right Policy
When looking at income protection, think about:
How much income you would need to cover essential bills.
How long you could manage without cover, known as the “deferred period” (the time between stopping work and payments starting).
Your occupation, as some jobs may carry more risk.
Your existing benefits, such as workplace sick pay and how long this lasts.
An adviser can help you compare options and choose a policy that balances cost with the protection you need.
When Should You Review Your Cover?
Your circumstances will change over time, so it is a good idea to review your policy regularly. This is especially true if you move to a new job with different sick pay benefits, take on a mortgage or larger financial commitments, have children or other dependants, or experience health changes that could affect your needs. A regular review helps keep your protection aligned with your lifestyle.
Frequently Asked Questions
How much does income protection cost?
Premiums vary depending on your age, health, job, deferred period and how much cover you want. An adviser can give you an accurate figure.
Does income protection cover redundancy?
No, income protection is designed for illness and injury, not redundancy.
Can I claim multiple times?
Yes, you can claim more than once during the policy term if you have repeated periods of illness or injury but make sure you check your policy for details.
What is a deferred period?
This is the time between stopping work and the policy starting to pay out. Choosing a longer deferred period can reduce your premiums, but you will need to cover expenses during that time.
Does it cover mental health conditions?
Many modern policies now include cover for stress, anxiety, and other mental health conditions, though the level of support can vary between providers.
In Summary
Income protection insurance is about safeguarding your most valuable asset – your ability to earn. It provides regular financial support when you cannot work, helping you maintain stability for yourself and your family.