Most people insure their house and their car. Fewer insure the thing that pays for them: their income. Income protection replaces part of your pay if illness or injury stops you working.
How it works
You choose a monthly benefit. Benefits typically replace between 50% and 65% of your income. If you can't work because of illness or injury, the policy pays that amount after a waiting period. It pays until you go back to work, until the policy ends or until you retire, depending on the terms you chose. You can usually claim more than once.
Unlike a lump sum, it arrives every month, like the wage it replaces. That makes it easier to budget around.
The deferred period
The deferred period is the gap between becoming unable to work and the first payment. The usual choices are 4, 13 or 26 weeks, or a year. A longer gap lowers the premium. A short one costs more.
The sensible length depends on what else you have. An employee with six months of full sick pay can choose a long deferred period and pay less. A self-employed person with no sick pay and limited savings needs a short one.
What counts as being unable to work
This is the part to read most carefully. Policies define it in different ways. Some look at whether you can do your own job. Others ask whether you can do any work that suits your training and experience. The definition decides whether you can claim.
Some policies also pay a reduced amount if you can do part of your work, which helps if you return gradually.
How much, and for how long
Insurers cap the benefit as a proportion of your earnings. You can usually choose how long a claim pays, from a fixed number of years up to retirement. Longer cover costs more.
Cost
The premium depends on your age, occupation, health, smoking status, the share of income covered, the deferred period and the payout length. Some premiums are guaranteed for the term. Others are reviewable and can go up. Ask which you are being offered.
Benefits from a personal policy, where you pay the premiums yourself, are normally free of income tax. Benefits from a policy your employer pays for can be taxed.
Who needs it most
The self-employed have the clearest case. They have no employer sick pay, and an illness stops their income straight away. Statutory Sick Pay is a flat weekly amount set by government, so check the current rate on gov.uk.
It also matters for anyone whose household depends on one income, whose savings are thin, or whose employer pays sick pay for only a short time. Employees with generous sick pay and large savings need it less.
Income protection compared
Income protection and critical illness cover overlap, but they do different jobs. Critical illness cover pays a lump sum for a short list of serious diagnoses. Income protection covers a much wider range of illnesses and injuries, but pays monthly and only while you can't work.
Life insurance deals with the case where you die. A family that wants complete protection often holds all three in some form.
Richard goes through your income, your sick pay and your savings, and arranges cover alongside the rest of your plan. Start with our Family Protection page.