Income Protection: Everything You Need to Know


By Colette Machado

Income protection may be one of the most important personal financial products on the market; however, it might also be one of the least understood.

Its importance only becomes apparent when you’re ill and your work-related sick pay runs out. No money is coming in but there are still bills to pay and other living expenses to take care of.

To help you understand more about income protection, we’ve put together some of the most frequently asked questions about this cover and provided responses to each one.

What Is Income Protection?

Income protection insurance is a product designed to pay out a monthly income if you should become unable to work due to illness or injury and therefore are not earning your regular salary.

Why Do I Need Income Protection?

Many of us would find it difficult to pay our bills and other living expenses if our salary were to stop for very long. Even if you get sick pay from your workplace, it often ends after seven months – but your bills continue.

An income protection policy provides monthly payments which are designed to replace your salary until you can return to work. Having this financial support in place can give you peace of mind, which might help you get better quicker and back to work as soon as possible.

What Are the Two Types of Income Protection?

There are two types of income protection: short-term and long-term.

Short-term income protection is more affordable, because it will have a maximum number of years that it will pay per claim, usually one, two, or five years, depending on the period you choose when taking out the policy. Once you reach the maximum claims period, you would have to return to work in order to claim again on the policy.

Long-term income protection costs more because it could pay out until you are well enough to work again – or until you retire, die, or the policy term ends – whichever is soonest.

How Much Will It Pay?

An income protection plan will pay a monthly amount equal to a percentage of your gross salary (usually 50-70%) so that there is an incentive to return to work. However, this payout is tax free, so it may not be as far from your regular salary as it first appears.

How Much Cover Should I Have?

When looking at income protection plans, it’s common to start looking at the maximum amount of cover you can take out, but it is often better to assess how much you actually need. The more cover you take out, the more it’s going to cost.

For example, if your expenses are £1,500 per month do you really need to pay the extra premium for £2,000 worth of cover? It is often better to think about how much income insurance cover you need in terms of monthly outgoings, rather than income.

What Are Guaranteed Premiums for Income Protection?

With guaranteed premiums the monthly premiums you pay remain fixed over the entire life of the policy.

For example, if the monthly premium was £50.00 at the start of the plan it would also be £50.00 at the end of the plan. The insurer ‘guarantees’ not to change the premiums unless you make changes to the policy.

With a non-guaranteed policy, also known as reviewable, the cost of coverage will often increase every year or two. This puts individuals in a position of uncertainty, so do consider this option very carefully knowing all that you are signing up for. 

What Does Income Protection NOT Cover?

Income protection insurance covers most illnesses and injuries that prevent you from working – either in the short or long term – however, it does not pay out if you’re made redundant.

What’s the Difference Between Life Insurance and Income Protection Insurance?

Life insurance and income protection are two very different products: Life insurance pays out a lump sum in the event of your death, while income protection pays a percentage of your salary while you recover from an illness or injury.

What’s the Difference Between Income Protection and Critical Illness?

While both these products pay out in cases of serious medical conditions, there are differences.

Critical illness cover (or serious illness cover as provided by our life insurance partner, Vitality) pays a lump sum if you are diagnosed with a specific illness (an illness specified in the policy).

Income protection cover will pay a monthly income for a set period of time if you’re too ill to work or have had an injury.

Is It Worth Buying Income Protection?

No one knows when they are going to need income protection insurance. No-one plans to be sick. But if/when it happens, income protection can be a life-saver.

Getting sick pay from your employer for a number of weeks or months is great; however, if you’re off sick for a while, income protection can really help – since State benefits are so low that many couldn’t survive on them alone.

If you are self-employed, the need to have income protection is even greater, as once you fall ill and can no longer work, your money may automatically halt.

We hope this article has helped you understand Income Protection better.

If you would like to enquire more about income protection insurance or get a quote, please contact your Genistar representative or contact us here.

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