Income protection is an insurance policy designed to replace your income if you're unable to work due to an injury or illness. It can be in place for a set a period of time, or until you retire. You can also buy income protection to insure you against a short-term period of unemployment.

This article was updated in March 2024.

How would your family cope financially if you or your partner were unable to work?

According to the Office of National Statistics (ONS), the cost of property has risen by over 100% in some areas in the last ten years. Coupled with the current inflationary rise of just about everything else, many families now find themselves needing two incomes to achieve and maintain the lifestyle they want.

Should either of those incomes unexpectedly stop, it could spell financial disaster – or at the very least, a serious adjustment to your family’s standard of living.

If you’re single, or the sole earner in your family, a sudden loss of an income will have an even greater effect. There might be no one else you can rely on to help pay the bills – and unless you have another source of income, your ability to cope financially will be severely affected.

Each provider includes and excludes different conditions, so it's essential to check what you're covered for

Do I need income protection insurance?

If you’re employed and too ill to work, you’re likely eligible for up to 28 weeks of statutory sick pay, funded by the government. This is currently set at £109.40 per week, set to rise to £116.75 on 6 April 2024 – not nearly enough to cover most people’s outgoings.

What’s more, being unable to work due to illness or injury is more common than you might think. According to the Office of National Statistics (ONS), around 2.8 million people who are out of work and not looking for employment cited long-term sickness as the reason, and increase of more than 200,000 since 2020. That’s around 1 in 13 people of working age unable to work due to an illness or injury.

You may be in the lucky position that your employer offers more generous sick pay than the statutory minimum (perhaps up to three or six months at full pay, followed by a percentage of your salary for a period after that). Often this depends on how long you’ve worked for the company, so it’s important to check your employment contract to see where you stand.

But even if your employer offers generous occupational sick pay, if your illness or injury is a long-term condition, there will come a time when your monthly income stops. You are at particular risk if:

  • You’re self-employed and are the primary breadwinner
  • Your employer offers limited sickness benefits
  • You have no savings
  • You have a family that relies on your income
  • You are single and solely responsible for your household expenses

For those reasons, a product like income protection insurance could prove invaluable to your long-term financial security.

Critical illness cover is more expensive than life insurance because you’re more likely to make a claim

How does income protection insurance work?

An income protection policy will pay you a monthly income if you are unable to work due to an illness, injury or disability, or even unemployment.

It is different to critical illness insurance, which pays out a lump sum (instead of a monthly income) if you were to be diagnosed with a specified serious illness. For more information on critical illness insurance, see What to ask when taking out critical illness cover.

With income protection insurance, physical conditions like chronic back pain, a stroke or cancer can be covered, as can stress-related or mental health illnesses if they impede your ability to work. You can also choose an income protection policy to protect you against unemployment, but this type of policy will only typically pay out for 12 months or less.

Typically, an income protection policy won’t cover your entire earnings, but will pay out 50-70% of your salary. This is designed to incentivise you to go back to work – but it should at least cover you for the basics while you’re unable to.

Most income protection policies start after an agreed period, the earliest being four weeks after you’re unable to work. The earlier the payout, the more expensive it will be in terms of your monthly premiums. So, if your employer covers your sick pay for 6-months, you should arrange for your income protection to kick in from this point. You can choose a ‘stepped benefit’ income protection policy, which pays out a lower amount while you are still receiving a salary and increases as your employer’s payments reduce or stop altogether.

Other important considerations when choosing an income protection policy

Is the policy ‘index linked’?

An ‘index linked’ policy will increase the payout each year in line with the retail price index, so it keeps up with inflation. This is important if you have a long-term policy. If you have a non-index linked policy, your monthly income will erode in real terms as the years pass by, leaving you worse off.

Own or any occupation cover

If you choose an ‘any occupation’ policy, this means that even if you were no longer able to do your previous job but are deemed well enough to take on another form of employment, your policy may not pay out. For instance, if you have a high-stress role, such as a doctor, and are signed off with a long-term stress-related illness, your insurer may consider you capable of doing a less stressful job and refuse your claim.

To avoid this, you can take an ‘own occupation’ policy or a hybrid of the two, which will apply if you cannot do your own job, or a similar role suited to your experience or qualifications. But these policies are likely to be more expensive.

What types of income protection are there?

You can choose a long-term policy, which lasts until you retire, or a short-term policy, which typically pays out for 12 to 18 months.

You can choose between:

  • Accident and sickness cover, which can be taken out as a long-term or short-term policy and will pay out for any injuries or illness that are stopping you from working
  • Unemployment cover, a short-term policy lasting up to 12 months to give you time to find other employment
  • Accident, sickness and unemployment cover, a combined short-term policy encompassing all eventualities that generally pays out for a maximum of two years

Amber River Financial Planning

It’s usually best to consider income protection alongside other insurance policies, like life insurance and critical illness cover. An Amber River financial planner will give you their expert advice to ensure all your protection insurance policies are working in tandem to give you and your family the right level of protection.

Get in touch

To speak to one of our team, arrange an appointment or find out more, call 0800 915 0000, or alternatively use our contact form here.