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About income protection

One of the most useful types of life cover is a policy that is called ‘income protection. This type of policy is very relevant to today’s lifestyles and certainly more important than ever before because fewer and fewer employers offer sickness pay.

What is income protection insurance?

There are many different forms and types of income protection insurance, that essentially pay you an income if you’re off work due to sickness or accident.

Most income protection policies will provide you with a monthly income for a period of time, usually 12 or 24 months. You can also usually cover up to 85% of your gross monthly income which is to take into account the tax that you would normally pay.

Ultimately if you’re unable to work due to sickness then the very last thing that you need to be worrying about is paying your bills.

What are the main types of income protection?

There are 3 main types of income protection insurance that are specifically designed to fit different needs and budgets.

Income protection (short-term and long-term) pays you a monthly income while you are off work due to an accident or sickness. If you are signed off work by a doctor then your income protection policy should payout.

Personal accident insurance pays out if you are injured through an accident such as a sports injury or car accident. This type of cover is designed to provide you with financial support while you are off work or in hospital.

Sick pay is another simple type of cover that provides you with a monthly income for a period of up to 12 months. This is an easy policy to buy as it usually does not require any medical information or checks.

Here are just a few things that you might need to know if you’re considering an income protection policy. If you need any more information then you can speak to one of our team of income protection experts on 0800 009 6559.

Who needs income protection?

If you are employed or self-employed then you might want to consider income protection. Your employer will usually pay you for a short period of between a week and 6 months depending on what your job is.

If you need to be out of work for longer than this then you’ll need income protection to pay your bills. Most people will have a need for income protection at some point in their working lives for one reason or another.

According to LV=, the TOP 3 income protection claims are:

  • Mental health (29% of claims)
  • Musculoskeletal (25% of claims) *accidental injury and fractures
  • Cancer (15% of claims)

LV paid out over £14 million in income protection claims in 2019

What does income protection pay for?

You can use your monthly income protection benefit to pay for the standard outgoings that you would normally be paying. The policy is designed to pay out an equivalent amount to your monthly salary (after-tax).

Normal outgoings that you can cover include:

  • Mortgages
  • Rent
  • Debts (e.g. loans, credit cards, etc.)
  • Bills (e.g. utilities)
  • School fees
  • Cost of living (e.g. food, clothes, etc.)

The main point of an income protection policy is to make sure that you don’t suffer financially if you’re sick or injured.

How much is income protection?

The cost of an income protection policy can vary dramatically depending on what you need and the amount of cover. Premiums for younger people are always going to be lower as well because the risks of claims are considered to be less.

Generally, there will be a policy to suit your budget and your needs as long as you are realistic about how much cover you need.

There are a few tricks to help make income protection more affordable:

  • Deferred periods: make sure that you consider how long you could manage financially if you were unable to work. Shorter deferred periods will always cost more because the cover kicks in sooner but that isn’t always the best option.
  • Payment periods: you can select from several options including 12months, 24 months, or long-term cover. Shorter-term payment policies are cheaper than longer-term ones and can still provide adequate protection.
  • Shorter-term: you can also change the term of the policy so you might want to consider how long you’ll need the cover for. Most people will want cover ideally to retirement age but that’s not always affordable or possible.
  • Age rated: it is also possible to get a policy that is rated by age so premiums start lower and then increase over time (as you get older). This type of cover can be cheaper, to begin with, but you need to check what the premiums increase to.
  • Change insurer: some insurers offer cheaper premiums than others based on age, level of cover, and term. You could get a lower premium by searching with multiple insurers or speaking to a whole of market broker.

It is always worth reviewing your cover regularly as well to make sure that it’s the right amount and term.

Can I get income protection with a medical condition?

YES – most insurers offer income protection to people with pre-existing medical conditions. Income protection is an underwritten policy that is the same as other forms of life insurance and personal protection.

You can usually get income protection with most pre-existing medical conditions as long as your symptoms aren’t too severe.

There are some circumstances that might not be available or where an exclusion to your cover might be applied. This can be because of a number of reasons and if you get declined then it’s always worth checking with a medical conditions expert.

What does ‘exclusion’ mean with income protection?

If you apply for an income protection policy and you have a medical condition, dangerous job, or hazardous activity, then you might be offered cover with an exclusion.

This is simply where the cover will pay out for most things, however, your exclusion will not payout. Exclusions can also vary from one insurer to another so it is worth checking a few different companies if you are offered this.

A typical exclusion might be, someone who takes part in a dangerous sport or activity such as mountaineering. If you get injured taking part in that activity then your policy wouldn’t payout, however, anything other than that activity would payout.

Will income protection payout?

According to recent statistics from the Association of British Insurers (ABI), in 2019 there were (individual and group income protection):

  • Income protection claims paid: 27,275
  • Percentage of new claims paid: 87.2%
  • The total value of claims paid: £669,397,000
  • The average value of claims paid: £20,425.41

The main claims on income protection insurance are musculoskeletal, followed by mental health, then cancer.

Can I have income protection if I’m self-employed?

YES – income protection is possibly even more important for people who are self-employed (including contractors). You can take out a policy if you are self-employed in exactly the same way as someone who is employed.

Your income will just need to be proved by your accountant or your latest accounts to verify your earnings. Self-employed earnings can vary more than people who are employed which is understandable and policies will usually take this into account.

When taking out a new policy you should think about what your average income is, including salary, and dividend.

Can I put income protection premiums through my business?

It is possible to pay your income protection premiums through your company, however, there is no real tax advantage to this. You should speak to your accountant if you are unsure about this and get proper advice before you do anything.

There are some policies that can be paid through your business as a benefit from a selection of insurers. These policies tend to be very specific and designed for a certain purpose, so they might not suit your needs.

Will I pay tax on income protection?

NO – you shouldn’t have to pay any tax on your income protection claims as this is not an income from employment. You’ll simply make your claim to your insurer and then they will pay the benefit directly to your bank account.

Income protection is treated the same as life insurance, and critical illness cover in terms of tax rules. There should be no taxable element to the benefit that you receive unless there is a very specific reason for this.

If you are unsure about this then you should speak to your accountant and get proper tax advice.

How long will income protection payout for?

There are two main options for payment periods with income protection, commonly known as short-term and long-term.

Short-term income protection usually pays out for either 12 months or 24 months (premiums for 24 months are usually higher)

Long-term income protection will usually be higher premiums than short-term, however, you should be aware that your cover will payout for the full term of the policy. For example, if you claim in year 3 of a 20-year policy then you could receive a payout for up to 17 years.

Your claim will also payout for a period of time from the start of the claim up to when you are fit to return to work. Some insurers also offer a benefit that can help you to return to work from longer-term sickness.