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Guide

Income protection insurance explained

Find out what income protection insurance is, how it works and why you should consider it.
Income protection insurance covers your income if you become ill or get injured and can’t work. It ensures you're paid a regular income until you can return to work, or you retire. 

It's also known as IP insurance, and used to be called permanent health insurance. 

How does income protection insurance work?

When you buy an income protection policy, you'll choose the amount of cover you need and the policy term. The amount of cover you'll need depends on:
  • Your salary
  • Your outgoings
  • How long you expect to be out of work for
  • Any expected medical bills.
You will also set a waiting period. This is also called the deferred period. It's the period it takes for your cover to be paid following an illness or accident. You have a choice of deferred periods and it should usually match your sick pay so that when it ends your benefit starts. The longer the deferred period, the more affordable the premium is. If you have six months of sick pay, for example, then you would set your waiting period to six months. 

Once your plan is set up, you will pay a monthly premium. If you become unable to work due to sickness or injury, you'll get a payout. Your cover will last until the end of the term or until you retire ­– whichever is first. 

You won’t receive the full amount of your gross salary but you can expect from 50-60%. As the payment is tax-free, the amount you receive should be around the same as your net income.
 
Many factors will affect how much your premiums cost. Including:
  • Your age
  • Your medical history
  • Your alcohol consumption
  • Whether or not you’re a smoker
  • Your occupation.
Insurers will usually class different jobs at different risk levels. If your job is in a high-risk category, you may need to pay higher premiums, for example.

The benefits of income protection

Income protection insurance can buy security if you were unable to work due to an illness or injury.

If you depend on your income to pay bills and rent, for example, it could be a good idea to consider it.

Income protection insurance could be more beneficial if you:
  • Have limited savings - think about how long this could cover you for if you were unable to work
  • Have a family or dependents - if you have a partner or children who rely on your salary, you may want to consider income protection
  • Have outstanding debt - 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.

Income protection will provide a list of the type of illness and injury they cover. Different policies will cover different types of injury and illness. If there is something specific that you want to be covered for, you’ll need to check that it’s included in the policy.

Most policy providers will cover different types of cancer, strokes and heart attacks. 

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.
 

Do I need income protection and critical illness cover?

Income protection and critical illness cover pay out if you become ill. There are differences in the types of illnesses covered and the way the policies pay out: 
  • An income protection policy gives you regular monthly tax-free payments. Critical illness cover pays out a tax-free lump sum
  • The types of illnesses covered across both policies are different. Make sure to check the small print
  • With income protection, there is no limit to the number of times you can claim. A critical illness plan may end following a single claim.
It is possible to buy both income protection and critical or serious illness cover.

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 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.

Find out more about our income protection cover, or get a quote here.

Relevant guides and articles

  • 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.

  • 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.

  • Serious and critical illness cover

    Like income protection, serious and critical illness cover pays out if you're diagnosed with a serious illness. Instead of replacing your monthly income, it pays out on lump sum. Read more serious and critical illness cover in our guide.