Guide
Income protection insurance explained
What is income protection insurance?
Income protection insurance is a type of insurance policy that provides a regular monthly payment if you are unable to work due to illness or injury. The payout is tax-free and typically amounts to about 50% to 60% of your regular gross income.
Payments continue until you can return to work, or the policy term expires.
These payments can help you cover essential expenses, such as mortgage or rent, utility bills, childcare, and general living costs.How does income protection insurance work?
Once you set up your income protection plan, you will need to pay a monthly fee called a premium. If you become unable to work due to illness or injury, you will receive a monthly payout. This payment can cover living expenses while you are not working. Your cover will last until the end of the term whichever is first.
You won’t be able to insure yourself for the full amount of your salary, but you can usually expect payout amount up to 60% of your gross salary, depending on how much you earn.
You and your insurer will also agree on a waiting period. This is also called the deferred period. This is the time you have to wait before your payments start after an illness or accident.
You can choose how long this waiting period will be, and it should match your sick pay from your employer. For example, if you get six months of sick pay, you would set your waiting period to six months. This means you can start claiming your income protection insurance after that time. The longer the deferred period you choose, the more affordable your monthly premium will be.
What are the different types of income protection insurance?
There are two main types of income protection insurance – short-term and long-term.
What is short-term income protection insurance?
Short-term income protection provides a monthly income if you are unable to work due to illness or injury. Payments are limited to a maximum period, usually between 12 and 24 months. After this period, you cannot make further claims unless you return to work and then become ill again.
Short-term income protection policies are often more affordable than long-term policies.
What is long-term income protection insurance?
Long-term income protection is also known as long-term sickness insurance. It covers you to the end of the term of the plan. This is usually set at retirement.
How do I know if income protection insurance is right for me?
Income protection provides financial security in case you are unable to work. If you depend on your income to pay bills and rent, for example, it could be a good idea to consider this type of insurance.
Income protection is worth considering if:
- You have limited savings - Think about how long your savings could cover you for if you were unable to work. Would it be enough to pay for your essential outgoings until you can go back to work?
- You have a family or dependents - Do your partner or children rely on your salary? Then, you may want to consider income protection. This could help to take care of them while you’re getting better.
- You have outstanding debt - are you currently working on paying off any credit cards or loans? You could use some of the money you receive from income protection to keep on top of these payments.
There are also instances in which income protection may not be the best option. For example, you have enough savings for bills, but not enough to cover your mortgage. In this case, you could consider mortgage protection insurance.
How much does income protection insurance cost?
Insurers will ask you to share certain information about your lifestyle and health records. This will affect how much you will pay each month. Many factors will affect how much your premiums cost. Including:
- your age
- your medical history
- your family’s medical history
- your alcohol consumption
- whether or not you’re a smoker
- your job
- your cover level
- your cover term
- your choice of deferred or waiting period
Do I need income protection and critical illness cover?
Both income protection and critical illness cover provide financial support if you become ill, but they work in different ways:
Income protection: This policy gives you regular monthly payments that are tax-free. It helps replace your lost income if you can't work due to an illness or accident.
Critical illness cover: This type of insurance pays out a one-time lump sum that is also tax-free. It helps you financially if you are diagnosed with a serious illness listed in your policy.
The key difference is that with income protection, you can claim as many times as you need, while a critical illness plan might end after one claim. You can choose to have both income protection and critical illness cover for extra security.
Vitality income protection insurance
Want to know more about income protection insurance or thinking about taking out a policy? Here are some of the benefits of taking out income protection with Vitality:
- Get up to 20% extra on your monthly payout for six months just by looking after your health.*
- We’ll automatically guarantee your benefit amount up to £1,500 per month. When you verify your earnings up to £8,000 a month.**
- Get access to our private healthcare network to help your recovery including physio, therapy and cancer support when you claim.
- Benefit from your plan straight away through the Vitality Programme and get discounted spa breaks, weekly coffees and gym membership.
Last updated: 22 January 2025
* Payouts can be boosted by up to 20% for the first 6 months of your claim when you reach Silver Vitality status or above. The booster amount is based on your Vitality status at point of claim.
** To guarantee your benefit amount for earnings between £1,500 and £8,000, you can verify how much you earn by giving us financial information within the first six months of the plan.
Income protection insurance FAQs
Does income protection cover redundancy?
Most insurers do not cover redundancy with an income protection policy. But, every insurer is different, so it’s worth checking.
Can I claim ESA if I have income protection insurance?
Yes. You'll still be eligible for the employment support allowance (ESA). But, it may affect your payout. Income like state benefits, non-employment related dividends, and rental income don't affect payouts.
Is income protection the same as payment protection insurance (PPI)?
No, these two types of insurance are not the same and work in different ways.
Income protection insurance provides a percentage of your current salary if you are unable to work due to illness or injury. In contrast, payment protection insurance (PPI) covers your monthly loan or debt repayments if you cannot make those payments because of sickness or job loss.
Can you get income protection if you’re self-employed?
Yes, self-employed individuals can get income protection insurance. It could be particularly important for self-employed workers because they don't have the same benefits as employees, such as sick leave, retirement contributions or disability benefits provided by an employer.
How much money would I receive?
Depending on the cover you select at the start of your policy, you could get up to 60% of your gross salary, depending on your income. The payout can be lower if you select a lower amount of cover.
Is income protection taxable?
The money you will receive from income protection is usually tax-free. This is why insurers will cover you for up to 60% of your gross income. It works out approximately the same as if you were receiving your net income with tax deducted.
Relevant guides and articles
-
Serious Illness Cover vs Critical Illness Cover
Need help choosing between critical illness cover and serious illness cover? In this guide we look at the similarities and differences between the products.
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What is mortgage protection insurance?
Mortgage protection is a type of life insurance designed to pay off your mortgage. Read our guide to help decide if it's a good option for you and your family.
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Self-employed income protection insurance
Self-employed and thinking about income protection? Read our guide to help understand how it works and if you need it.