Income protection insurance is one of the lesser known types of insurance. In fact according to Which, only 9% of people have income protection insurance, compared to 41% who have life insurance. However, each year almost a million workers find themselves taking unplanned, long term leave.
So if your savings won't stretch to cover any long periods out of work, income protection might be a safety net worth considering.
What is income protection insurance?
Income protection insurance is a type of insurance policy that will replace a proportion of your salary if you find yourself unable to work. A typical policy will cover around 65% of your income.
It will cover you if:
- an illness means you have to take a long time off work
- you have an accident that prevents you from working
In comparison, a life insurance policy only pays out if you die (or sometimes if you have an illness that will lead to your death).
Long term income protection vs. short term income protection (STIP)
There are two types of income protection insurance - long and short term.
Long term policies cover a wide range of illnesses and accidents. They will usually pay out until you can return to work, no matter how long that takes. If you're not able to return to work, long-term policies will pay out either until the end of the policy term, until you retire or even until you pass away – depending on which event happens first.
Short term income protection (STIP) on the other hand, will usually only cover you for up to 12 months if you can’t work. STIPs also cover fewer illnesses and injuries, but unlike long-term policies, they tend to cost less.
Why might you consider income protection insurance?
- If not being able to work would mean that you can’t pay your bills or get through day to day life
- If you have children or other dependents who rely on your income
- If you don’t have sick pay to fall back on. So if you are self-employed or don’t get statutory sick pay, a long term illness could leave you out of pocket pretty quickly.
This depends on what type of policy you have. Long-term policies tend to cover most illnesses, whereas short term policies will cover a smaller range. Income protection policies usually cover things from terminal illness, to accidental injuries, to mental health conditions that leave you unable to work. Some types of income protection policies may even cover you for involuntary redundancy.
However, if you have any existing illnesses your income protection policy may not cover them – so make sure you read the terms and conditions.
How does it work?
Income protection insurance works like any other form of insurance. However unlike other insurance types, once you've made a claim there's usually a pre-agreed waiting period before the insurer will pay out. This period generally ranges from 1 to 12 months after you put in your claim.
Once this waiting period has passed, you'll usually be given monthly tax-free payments which will help with the costs usually covered by your salary. Depending on the policy you have, these payments can be backdated from day 1 of your time off work.
The factors that affect the cost of your policy
Like most types of insurance, there are a number of personal factors that insurers may take into account when deciding on the cost of your premium. These include things like your age, your health, your family medical history, and whether or not you smoke. Policies that cover a wider range of illnesses are likely to have higher premiums than ones with more limited cover.
The cost of your policy may also be affected by the terms you agree to. For example, if you want to be covered for a higher percentage of your income this is likely to cost you more. And if you want a shorter waiting period between making a claim and getting a payout, then this could make your policy more expensive.
*Association of British Insurers, 2014 protection report