Income protection
Income protection insurance (also called permanent health insurance) can pay out a tax-free income after the statutory sick period ends.
What it does
It replaces part of your income (tax free) if you are unable to work for a long period of time because of illness or disability, and will continue to pay out until you can return to some kind of paid work or reach retirement, whichever is sooner.
It has a waiting period before it will start to pay out. The longer you agree you'll wait, the lower your premiums will be, so it is important you find out what income you can get from your employer, and other insurance (such as mortgage payment protection insurance) in the event of illness or disability.
This cover might not be available to you if you have existing health problems or a dangerous job.
Key things to think about
If you are an employee and you fall ill, your employer might pay you your full pay for a few weeks or months. By law, an employer must pay most employees statutory sick pay for up to 28 weeks, though this will probably be a lot less than your full earnings. After that, you would probably have to rely on State benefits.
However, some employers arrange group income protection insurance for their employees as a perk of their job, which can pay out an income after the statutory sick period. So check what you are entitled to.
If you are self-employed, you won't have this option.
State benefits are not generous. You would probably see a substantial drop in your income if you were out of work for more than a few months because of illness or disability.
Insurance aims to put you back to the position you were in before you suffered a loss. But it does not allow you to make a profit out of your misfortune. So the maximum amount of income you can replace through insurance is broadly the after-tax earnings you have lost less an adjustment for State benefits you can claim. This usually translates into a maximum of, say 50% to 65% of your before-tax earnings.
Example of working out how much cover you might need
Sue is single and earns £26,000 a year before tax and other deductions. She estimates that, if she was ill for a long time, her budget would be affected as shown in the table below.
| Sue's budget calculations in the event that she couldn't work | Her estimates |
|---|---|
| Income she would lose Her take-home pay |
£18,000 |
| Deduct income she would gain Approximate long-term incapacity benefit |
£4,000 |
| Deduct expenses Sue would save Work-related costs (such as travel, food and clothing) |
£3,000 |
| Add extra expenses she would pay Allowance for, say, cost of special equipment or treatment, cost of heating her home for more time |
£2,000 |
| EXTRA INCOME NEEDED | £13,000 |
Sue reckons she would need around £13,000 a year to maintain her lifestyle. This is half her before-tax pay of £26,000.
Sue also works out that as a perk of her job, her employer will pay her half a salary for 52 weeks after the statutory sick pay period of 28 weeks. She therefore arranges for her policy to pay out after 80 weeks of incapacity (see waiting period below).
More details on how protection insurance works are set out below:
Cost
You pay a monthly premium throughout the term of the policy. Cost depends mainly on:
- Your age – at the time you start the policy. Older people are more likely to suffer an illness, so pay more.
- Your sex – gender can have an affect on the premium you pay.
- Your health – at the time you start the policy. If you have existing health problems you might be refused cover or have to pay more.
- Your job – some jobs are more likely than others to contribute towards illness. For example, a bank clerk is deemed to have a very safe job but a deep sea diver runs high risks and so would have to pay more.
- Hobbies and lifestyle – for example, smoking makes you more likely to become ill, so you'll pay more.
- Waiting period – once you claim, there is a delay before payments start. You can choose how long this is, for example from 4 weeks up to 104 weeks. The longer the waiting period, the less you pay.
Access
- If your health is poor or your lifestyle is considered risky, you may be refused cover or have to pay more than normal.
Terms
- Check whether you already have protection in place in case you get incapacitated, and for how long that protection would last. For example your employer may have an income protection scheme in place you can benefit from, or you may have a payment protection insurance that covers your mortgage.
- Check whether the policy reduces what it pays out if you receive state benefits or claim money under any other insurance policy.
- Some policies only pay out if you can't do any work, but you would have to be seriously incapacitated for you not to be able to work at all. Others cover being unable to do any work for which you are suited. The best pay out simply if you can't do your normal job, but premiums tend to be more expensive.
- Most policies would pay out until your reach age 65 or when you have chosen the cover to end.
- Check how different occupations are treated. Different insurers put the same job in different risk categories.
- Does the cover increase in line with inflation?
Some advisers suggest that critical illness insurance – which pays out if you are diagnosed with a life-threatening condition listed in the policy – is a cheaper and simpler alternative to income protection insurance. But there are lots of common situations when critical illness insurance would not pay out, for example if you had back problems or a stress-related illness. Additionally, not all occurrences of the critical illnesses listed are covered, for example some early stages of cancer are not covered. For more information on this see Critical illness insurance.
