Income protection insurance refers to a group of insurance products that help you out financially, if you lose your income due to injury or illness. The COVID-19 pandemic has greatly increased awareness of the importance of having a safety net to fall back on in times of financial hardship.
Despite this, one of the best ways of strengthening your financial resilience – income protection insurance – remains poorly understood. Research1 suggests that nearly half of the UK’s working population (46%) have heard of income protection insurance, but don’t know what it covers or how it works
How does income protection work?
In a nutshell, income protection is a type of insurance policy that ensures you receive a regular income if you’re unable to work due to illness or injury. It will usually pay out a percentage of your normal monthly income to help you pay your bills, rent/mortgage or essential living costs, taking the pressure off until you can return to work.
Some types of income protection are designed to cover specific types of payments, for example your mortgage or credit card payments. There are two main types of income protection: long-term and short-term.
The former will supply you with a regular income until you return to work, retire or die, whichever occurs sooner. The latter will pay out for a specified time period, usually six months to a year.
Most income protection policies will have what is called a ‘deferral’ period, lasting some weeks or months before payments begin. The longer the deferral period, the lower your premiums are likely to be.
What does income protection cover?
In contrast to a critical illness policy, which only covers a strict list of specified illnesses, an income protection insurance policy will cover most illnesses or injuries that leave you unable to work (this will depend on the policy, however).
Another advantage is that it can be claimed as many times as you need it for the duration of the policy term. Some policies will also cover redundancy or unemployment on a short-term basis, although it is currently more difficult to find suitable cover due to the coronavirus pandemic.
Do I need income protection?
In order to work out whether income protection may be suitable for your circumstances, it can be useful to ask yourself the following questions:
- Could I survive for more than a couple of months without my income?
- Could I get by on my employer’s sick pay/Statutory Sick Pay?
- Could I rely on support from my partner or family?
If the answer to any of these questions is ‘no’, then taking out income protection cover is likely to be a wise choice.
But which type of income protection do I need?
Still confused? Not to worry, we are on hand to help you select the income protection policy that works for you.
As with all insurance policies, conditions and exclusions will apply.
1 The Exeter, 2021