Income Protection Explained

What Is Income Protection?

Income protection insurance pays you a regular monthly income if you are unable to work due to illness or injury. Unlike critical illness cover — which pays a one-off lump sum for specific conditions — income protection pays out for any illness or injury that stops you working, for as long as you remain unable to work (up to the policy's maximum benefit period).

A good income protection policy can pay out until you return to work or reach retirement age. It is one of the most comprehensive and underused forms of personal protection available.

How Much Does It Pay?

Most policies replace between 50% and 70% of your pre-tax income. The payout is paid free of income tax (because you are paying the premiums from your taxed income). Some policies also include additional benefits such as rehabilitation support or a return-to-work programme.

The Deferred Period

Income protection policies include a deferred period — the length of time you must be unable to work before the policy starts paying out. Common deferred periods are 4 weeks, 8 weeks, 13 weeks, 26 weeks, and 52 weeks.

A longer deferred period means a lower premium. If you have savings, an employer sick pay scheme, or other income to cover a period of absence, you can choose a longer deferred period to reduce your costs.

Own Occupation vs Any Occupation

The definition of incapacity used in the policy is critical:

• Own occupation: The policy pays out if you cannot do your own specific job. This is the most comprehensive definition and the one we recommend for most clients.
• Suited occupation: The policy pays out if you cannot do your own job or any job suited to your skills and experience.
• Any occupation: The policy only pays out if you cannot do any work at all. This is the most restrictive definition and the hardest to claim on.

Why It Matters for the Self-Employed

Employees often have access to employer sick pay — sometimes for six months or more. The self-employed have no such safety net. If you cannot work, your income stops immediately.

For self-employed individuals, income protection is arguably the most important insurance product available. It ensures that a period of illness or injury does not result in financial hardship, loss of a home, or the collapse of a business.

Executive Income Protection for Directors

Company directors can also arrange income protection through their company — known as Executive Income Protection. The company pays the premiums as a business expense, and the policy pays out to the company if the director cannot work. The company then continues to pay the director's salary.

This can be more tax-efficient than a personal policy for directors who take a salary through their company.