What is income protection insurance? Do you need it and how it might benefit you...

More commonly, employers will offer a government support system known as Statutory Sick Pay (SSP), currently paying £118.75 per week for the first 28 weeks of absence[1]. In most cases, this is not going to be sufficient to replace the income lost due to absence from work. This is especially true when you consider that the impact often extends beyond the obvious of paying the mortgage and bills. A loss of income could result in an inability to pay premiums on other insurance policies and force you to cease contributions into pensions and savings plans. This could in turn impact the affordability of your future goals.

So, how can you better protect yourself against such an event and increase your financial resilience?

What is income protection insurance?

Firstly, everyone should have an emergency fund designed to cover you for unforeseen events. The amount you need will be based on your own circumstances, but a good guide is around six months of your typical expenses to be available in an instant access savings account . Research carried out in 2024 showed 13% of UK adults have no emergency fund with around 53% holding below the minimum recommended[2]. Focus should therefore be paid to building a suitable emergency fund. However, this is designed to cover short term funding gaps and will not support a long term loss of income.

A longer term solution is to insure your income using an income protection plan. This is a form of insurance taken out to protect your income stream. It is designed to pay more than your net income (income less taxes) in the event of accident or illness. An income protection policy could help you continue meeting your regular commitments and protect your future financial plans from being derailed.

What does income protection insurance cover?

Income protection insurance covers most illnesses or injuries that prevent you from being able to work. It typically pays out a monthly benefit until you are well enough to return to work, reach the end of the policy term, or retire, depending on the terms of the policy. However, it’s important to understand that the benefit is not designed to fully replace your income. Payments are usually limited to a specified percentage of your pre-claim earnings, typically around 50-60% for individual policies, and up to 75% for group schemes.

Most policies cover a wide range of medical conditions, both physical and mental, but they do not usually pay out if you are made redundant or lose your job for non-medical reasons. It is important you disclose any pre-existing medical conditions during the application process to avoid the risk of policy denial or a reduced payout.

Why it might be right for you

You may be thinking, I’m young and fit, why would I need to worry about income protection? According to Royal London, the average age of an income protection claim in 2023 was 38.[3] Furthermore, when looking at a couple aged 35 who are non-smokers and targeting a retirement age of 65, there is a 38% chance of them being off work for two months or more before their retirement date. That’s a significantly higher risk than the likelihood of them dying during the same period.

What’s more, the average claim on individual income protection lasted five years, eight months. [4] Without adequate protection, being off work for that length of time could have a serious impact on your financial goals and lifestyle.

Hopefully, for those with none or minimal cover the case for individual income protection is becoming clear. For those in the fortunate position of being covered by a group income protection scheme via their employer, it is worth remembering that these benefits are often discretionary and may be withdrawn at any time or reduced. Equally, moving jobs may result in a change of benefits package with your new employer.

In addition to the core income cover, many protection plans come with value added benefits. Access to private GPs, bereavement counselling, fracture cover and other services may be offered at nil cost, and using these benefits does not class as a claim on your policy. These could be valuable services that enhance the overall value of your plan.

How much does income protection insurance cost?

Income protection insurance usually involves monthly premiums, with underwriting costs depending on factors such as your age, job type, health, deferred period and the amount of cover you choose. Policies that pay out a higher percentage of your income or offer longer payment periods generally cost more.

It will also depend on whether you select a reviewable premium policy, which can increase over time but allows the insurer to offer lower premiums at the outset, or a guaranteed premium, which remains fixed. A guaranteed premium tends to cost more in the short term, but you have the added benefit of knowing it won’t change.

Speaking to a financial adviser can help to ensure you make the right decision for your circumstances.

Protecting yourself and your family

Statistically, income protection is likely to be the most called upon personal protection policy pre-retirement, certainly when you compare long term sickness with the risk of death or critical illness[5]. Yet many people will be under-insured and at real risk from the impact of a loss of income to them and their family.

Working with a financial planner can help explore the value of this form of insurance for your individual circumstances and reassure you that your needs could continue to be met in the event of a sustained absence from work.