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How Does Income Protection Work?

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Income protection is designed to replace your salary and will provide a tax-free income if you are unable to work through illness or disability.

The policy pays a monthly tax-free income until you recover and can return to work, or you retire.

This insurance covers most illnesses that leave you unable to work. These include both mental and physical health conditions.

Do I need income protection insurance?

When deciding whether or not you need income protection, think what you would do if you couldn’t work due to illness.

  • Does your employer offer sick pay – how much is it?
  • Do you have adequate savings or investments to cover a long period of not working?
  • Could you survive on state benefits?
  • Could your partner support you if you were too sick to work?

With the cost of living rising, energy bills going up and mortgage rates increasing, making sure you have enough money to live on has never been more important.

If you’re self-employed, or you’re employed but would only get statutory sick pay (SSP) if you were sick, income protection could offer a vital safety net.

Do tenants need income protection?

Taking out a policy is a good idea for both renters and owner-occupiers. If you were renting and were too ill to work, your landlord would still expect you to pay your rent.

If you have a mortgage, you’d still need to keep up with your monthly payments whether you were working or not.

Some homeowners might already have mortgage protection insurance to cover their mortgage payments.

If you’re worried about your mortgage, it advised to speak to an experienced adviser about your mortgage options.

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Your property may be repossessed if you do not keep up repayments on your mortgage.

How does income protection insurance work?

The maximum cover you can have is usually 50 to 70% of your gross income, but as it is paid tax-free it should mean that you can maintain a similar level of take home pay.

Some income protection policies have a ‘waiting period’ or ‘deferred period’ before they pay out – sometimes up to 12 months.

Policies normally offer a choice of deferred periods, and it should usually match your sick pay so that when it ends your payments starts.

For example, if you have three months of sick pay, then you would set your waiting period to three months. The longer the deferred period, the cheaper your premium will be. If you have savings, you might work out how long they would last when choosing a deferred period.

The most expensive policies offer “back to day one” cover or policies that start paying within 30 days.

How much cover do I need and how much will it cost?

When you buy an income protection policy, you’ll choose the amount of cover you need.

This will depend on your:

  • salary
  • outgoings
  • family circumstances
  • savings and investments

How much this will cost will depend on your:

  • age
  • job
  • policy term
  • pre-existing conditions
  • lifestyle

Income protection typically costs between £10 and £80 a month. Premiums usually rise as you get older.

How long does income protection last for?

Short-term income protection policies are cheaper – they pay out for one or two years.

Most policies will pay out until you can return to work, or you retire.

When it comes to being well enough to return to work, you need to check if the policy will pay out until you can return to your ‘own occupation’ (i.e. the job you usually do), a ‘suited occupation’ (a job you have the skills or experience to do), or ‘any occupation’.

It’s best to have a policy that pays out until you can return to your own job.

What do I need to know before taking out income protection?

When you take out income protection, the insurer will ask about your lifestyle and medical history. It will base your premiums on the information you give.

It’s important to answer medical questions honestly. Lying or omitting information is known as ‘non-disclosure’ and could result in your policy not paying out.

If you are receiving payments from an income protection policy and want to claim Universal Credit, income protection will treated as ‘unearned income’ and affect the amount of Universal Credit you receive.

What is not covered by income protection?

Income protection only covers you if you’re unable to work due to illness or injury – it doesn’t pay out if you are made redundant or get fired. It also won’t pay out to your family in the event of your death.

You’ll need to stay up to date with your premiums for the policy to stay valid.

Some policies won’t pay out if the illness or injury was caused by war, cosmetic surgery or because you took part in a dangerous activity without suitable equipment or training.

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Your property may be repossessed if you do not keep up repayments on your mortgage.

Last Updated: December 19th, 2022