Is income protection insurance worth it and why?

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Income protection is an insurance package that pays out in cases where you are unable to work as a result of illness or disease. If you are unable to work, the income protection insurance replaces a proportion of your income, which is important as your bills will continue to need to be paid, even when you are unable to work.

People also commonly refer to this type of payment protection as disability or sickness insurance.

For a plan to begin paying out, you must have an illness, injury or have suffered an accident to be eligible for benefits. 

Income protection insurance can cover short term periods of time, longer term periods, or instances where you need to permanently leave work. In the case of permanent life-changing disability, most plans will continue to pay until you reach the legal retirement age, or death.

The payments are usually worked out as a percentage of your income.

Income protection insurance payouts are normally tax-free.

It is surprising that only 9% of people have taken out some form of income protection insurance, particularly as premiums for cover can be tailor-made for you, and are made to fit with your income and your need.

Do you really need income protection?

When you think about illness and being unable to get into work, you normally imagine yourself having the flu or a stomach bug, when typically you only require a couple of days off work. But have you ever thought of having to be away from work for a longer period of time, for example as a result of an accident or a chronic illness such as cancer? And how you would manage without your wages coming in?

Many employers will still pay your salary while you are recuperating, but only for a certain period of time. In some cases, employers will be able to continue paying you for the initial six months to a year, and then after that, they may not pay you anything. Some companies will not even cover that length of time, and may only pay half your wages.

The state benefits you may be entitled to if you are not able to work as a result of illness or an accident are also unlikely to be sufficient to be able to cover your costs.

It is therefore surprising that only 9% of people have taken out some form of income protection insurance, particularly as premiums for cover can be tailor-made for you, and are made to fit with your income and your need.

Income protection insurance is also available for self-employed individuals and in these cases may be more necessary than ever.

Do you really need it?

The simple answer is yes. It’s less a question of whether you can afford it, as whether you can afford not to have it.

None of us plan to be unwell or to be involved in an accident, but the sad truth is that it can happen to any of us, at any time. Being prepared for this eventuality is extremely important because worrying about how you are going to continue to pay your mortgage when you are dealing with a serious illness, is the last thing you want to have to do.

In the same way that you may put aside money for savings, come up with a retirement plan and put money into a pension, income protection insurance is a key part of planning for the future.

Having income protection means one less thing to worry about at a time in your life when you will have more important things to focus on, and allows you the time you really need to recuperate instead of feeling the need to rush back to work before you are truly ready. Simply because you are worried about making ends meet.

How does it work?

There are many different types of income protection plans on offer in the market. When choosing which plan to go for, you can choose the level of coverage you would like to receive.

Obviously, the higher the benefits coverage, the higher the premiums you will be paying to keep coverage. 

Before you decide which plan to opt for, you will need to work out a few things such as;

The monthly benefit you would need to receive in order to be able to cover your bills and allow you to live. Some people elect for benefits that pay 50% of their monthly salary. Others opt for a plan that would pay out 100% of their income. Experts suggest 60-70% as a sensible figure that would allow most people to cover their bills and basic expenses. 

The deferment period you would like. A deferment period is the length of time you would need to be unable to work before your plan kicks in and payments will start being paid to you. Generally, the longer the deferment period on your plan, the lower your premiums will be. The usual deferral period is 13 or 26 weeks, but it can be as low as four weeks, if you are prepared to pay for this type of higher cover. 

The benefit payment period. How long would you like your plan to pay out for should you need to make a claim? Until you reach retirement age, or for a more limited time period?

The insurance plan you choose should always have clear definitions as to what constitutes illness and incapacitation so that you are clear in what circumstances you would be covered, and when you would not be.

If you fall ill, the insurance company will start to pay you a monthly benefit after the deferred period, and these payments continue until you either go back to work, you die, or your insurance term comes to an end.

Some policies also offer you the ability to claim multiple times. Which would be important should you recover and go back to work, then, unfortunately, fall ill again.

How much income protection insurance will I need?

The maximum amount available will depend on the chosen insurer. It typically ranges from between 50% – 75% of your current income.

You can also choose to have more than one policy of course, depending on your ability to pay but insurers will usually place a cap on how much payment protection you can have.

Bear in mind that state benefits for illness are around £100 per week. This is normally the full amount, and it is payable for up to 14 weeks when you are off work.

The amount of income protection you will need will depend on your needs and expenses such as; bills, mortgages, food, whether you have dependants, whether there is anyone else in the household earning a wage etc.

Payments are normally paid on a monthly basis. You therefore need to calculate the total amount of expenses you incur per month, and then work out what you could minimally live on, should the need arise. This is your minimum level of cover.

Once you have come up with the figure, then, you will need to adjust the deferral period so as to find the monthly premium that can fit your budget. The longer the deferred period, the lower the monthly instalment. If your employer pays sickness pay, or you could manage on state sickness benefits for a time, then factor this in when working out your deferment period.

How much does it cost?

The cost of the instalments will depend on the amount you wish to receive once you are unable to go back to work. This is the monthly pay-out that you will wish to have.

The monthly instalment that is charged by insurance companies reflects the chances and the risks that you shall claim. The higher the risk, the higher the premium.

Here is what the insurance companies normally consider when looking at how much you should pay;

Your age – The older you are, the more likely it is for you to develop a health-related complication and become unable to work, and hence this will increase the monthly premium. Therefore, older people pay more than young.

Job – of course, the type of job you do matters as well. If you work in a high-risk job such as construction, there is a higher chance of you becoming incapacitated at work regardless of your age, as compared to someone who works in an office all day long. Therefore, you may have to pay more in premiums in relation to the work that you do.

Social behaviour – there are questions that insurance companies will always ask you, such as if you are a smoker, or if you are an alcoholic. These are extremely important as they help in deciding your likely life span. People with such social behaviours are more likely to become incapacitated as a result of it.

Term – the length of time you have been covered also matters, because the longer you are covered, the higher your chances are of requiring a payout and hence your premium is going to be much higher than someone who has been covered for a shorter time.

Deferred period- the shorter the deferred period, the higher the premium. This is because, it means that the insurer will start paying you money earlier than anticipated, and hence they will need to start preparing for it. As a result, your premiums will be much higher.

The benefit amount – if you want to receive a larger amount of money when you are unable to go to work, then it is most likely that the insurance company will require you to pay more money in terms of monthly premiums.

Medical history – you will be asked about your medical history and particularly your pre-existing conditions. These are the keys to identifying how soon you may require a payout from the income protection insurance.

You must disclose this information truthfully on your insurance forms because if something were to happen and it could be later proved you had not disclosed any medical information related to the claim, it may invalidate your claim altogether.


All of us take our health for granted sometimes. However, in reality, one in two of us will need to take more than two weeks off work for an injury or condition at some point in our working lives.

If you were to be involved in an accident or taken seriously ill, have you thought about how you would continue to pay your bills and live in the way you are accustomed to? 

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