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What is income protection insurance and who needs it?


Income protection insurance is designed to pay you a monthly amount if you are unable to work due to illness or injury.

Many of us will insure a mobile phone, home contents or overseas holiday with barely a second thought, accepting the cost as one of life’s necessities.

But when it comes to protecting their monthly income, most Britons either don’t know it can be insured, or decide against it.  

That is despite the fact that being without their income, due to illness or injury, would prove far more costly and have much greater long-lasting consequences than misplacing a phone or luggage.

Income protection insurance can cover you for your entire earnings, or pay specific bills

‘Just 6 per cent of the UK population have income protection cover in place, representing approximately 3.6 million people,’ says Louise Colley, director of insurer Zurich’s retail protection business in the UK. 

There are several reasons for this reluctance to take out income protection.

Research shows that those that take out life insurance are less likely to take out other types of protection cover, even if this means that they are unprotected when an accident or illness renders them unable to work.

Another reason is that many people previously took out income protection through financial advisers, but with their widespread use declining, the insurance industry hasn’t been as efficient at promoting the benefits of protecting your income as advisers once were. 

Payment protection insurance mis-selling on an industrial scale by banks, credit card providers and other financial firms and the ensuing scandal didn’t help either – despite that and income protection being different.

This has resulted in an overall lack of awareness and knowledge about the benefits of income protection insurance.

Income protection is also not an easy product to quickly compare, and getting the best deal for you often requires advice or guidance. 

For example, This is Money’s protection insurance partner Cavendish Online, chosen as it can get you no-commission life insurance, doesn’t offer an online income protection insurance comparison and says people should speak to its advisers.

A spokesperson for Cavendish said: ‘In order to buy the correct income protection you need to take into account a number of important factors which, if not fully considered, could mean that you end up over or under protected. 

‘Talking to an expert with experience of providing the right protection based on an individual’s needs can be invaluable.’

What exactly does income protection cover?  

Income protection insurance, also referred to as income replacement, protects your monthly income if you can no longer work due to a serious injury or illness.

It is a separate product to life insurance, and many choose to take out both. 

Mike Donohoe, development director at Caspian Insurance, explains: ‘The essence of the products is the same, in so much as they are designed to protect you against financial loss.

‘But where they are very different is that life insurance helps to protect those loved ones you leave behind, whereas income protection protects you and your loved ones whilst you are still alive but unable to work and therefore facing financial hardship.’

Advisers say that customers often confuse it confuse it with payment protection insurance (PPI), which was the subject of a high-profile mis-selling scandal. 

While they may sound similar, these two types of cover are very different in what they offer (see PPI vs. income protection – what’s the difference?).

Does it cover me for redundancy? 

As a rule, income protection doesn’t cover redundancy – only loss of income for health reasons. Before the pandemic, insurers used to offer redundancy insurance to cover this particular risk, but many have removed this product now. 

That’s not to say that the product won’t be reintroduced into the market. More insurers could review their policy as the risk of people losing their job due to the pandemic recedes.

How much does income protection cost?

Some customers avoid income protection insurance because the monthly costs can seem expensive compared to other personal insurance premiums. 

However, the premiums can vary depending on the customer’s needs. 

Sarah Holt, head of partnerships at mobile money app, Monese says: ‘The average income protection cost will vary depending on several factors including your age, health, job, lifestyle, hobbies and more.

‘For example, a 30-year-old male heavy goods driver in the UK will pay an average of £35 pounds a month for long-term protected income insurance, or £20 for short-term salary protection cover.’

> Find out more about income protection by speaking at no initial cost to an adviser from This is Money’s carefully-chosen partner Cavendish Online   

How can income protection premiums be reduced?  

While it is an expensive product, there are ways to reduce the cost of the premiums. 

However, a reduction in premiums often means having to make some sacrifices when it comes to the level of cover.

Donohoe explains: ‘There are a number of factors that affect the premium when looking at income protection: age, smoker status and occupation are some of those. 

‘If a client needs to balance the cover against their budget, then there are options to reduce how long the pay-out would be made for, or to increase what is known as the payment deferment period.’

PPI vs income protection – what’s the difference?

Payment Protection Insurance (PPI) covers your outgoings, such as loans in the event you lose your job or can’t work due to illness or injury. 

Income protection, on the other hand, will cover your wider income. So not only will it pay out to cover your mortgage and bills but your lifestyle costs too, depending on the type of cover you choose. 

Defer when it pays out 

The deferment period is the waiting time between the accident or illness occurring, and payments starting to be made. 

The deferment period can be as short as a day or run into months. This gap could be covered by the customer’s salary, if their employer was still paying them, a notice period, sick pay, or by emergency savings.

Colley says: ‘Typically, these deferments are set at around three months, though if a customer makes this period longer, their premiums will reduce.’

While the payments may be deferred, customers could be able to access other benefits while they wait. 

Colley says: ‘As soon as customers notify us of a claim, they gain swift access to rehabilitation services like counselling or physiotherapy which can help with recovery and supporting them back to work.’

Donohoe adds: ‘It’s vitally important to discuss these factors with an adviser to ensure you understand exactly what your policy covers and critically, what it does not.’

Don’t cover all your bills and spending

You can also reduce the cost by only insuring yourself for larger bills, such as your mortgage and essential living costs – working on the basis that if you can’t work you can cut back on more discretionary spending.

Richard Horner, head of individual protection at insurer MetLife, says: ‘We’re starting to see more innovation in the market, which is good. 

‘For example, there are now income protection products for mortgage holders that will just cover their mortgage payments.’

As these types of products only cover certain bills and not the customer’s entire salary, they are often a cheaper alternative. 

Do I really need income protection?

Getting any type of insurance is generally considered a grudge purchase, as policy holders don’t see any benefits unless the worst happens. 

Louise Colley, of Zurich, says only 6% of people have income protection cover

Louise Colley, of Zurich, says only 6% of people have income protection cover

But not having this type of cover in place could leave you without a sufficient safety net to cover household bills and larger expenses like the mortgage or rent.

According to the Association of British Insurers’ Welfare Reform report, one million workers find themselves unable to work due to serious injury or illness every year.

What’s more, around 250,000 people leave employment each year due to ill health. 

That equates to around one per cent of the population, according to the ABI, with 60 per cent of those people being the breadwinner of a household.

How has Covid affected income protection insurance?  

The pandemic has put products like income protection, critical illness, and life insurance firmly under the spotlight. 

Income protection proved vital at the height of the pandemic as many fell ill and were unable to work.

But anyone hoping to take out a new policy once Covid hit would have seen prices initially climb – insurance experts say this has now settled down and costs are broadly level with before. 

Colley says: ‘Insurance payments to families affected by Covid-19 amounted £202million in 2020 alone. 

‘Zurich has also supported customers with free counselling and round the clock advice on everything from managing finances through to sourcing childcare.’

However, some insurers also put restrictions on existing income protection policies during the pandemic, as they believed people were more likely to need to claim. 

There is no reason why this couldn’t happen again if another pandemic were to hit.

Setul Mehta, head of business development and adviser services at The Openwork Partnership says: ‘Many providers had placed restrictions on existing elements of certain products such as exclusion on deferred periods. Also, if someone had tested positive for Covid, there was a pause on the ability to take out policies.

Did the pandemic ramp up the cost of premiums? ‘There hasn’t been a wholesale shift in premiums felt by the industry,’ Mehta adds. 

Could you live off your savings if an accident left you unable to do your job? If not, you could consider taking out income protection insurance

Could you live off your savings if an accident left you unable to do your job? If not, you could consider taking out income protection insurance 

How long should an income protection policy last?   

Those taking out a new income protection policy can choose how long they will be covered for. 

Donohoe says: ‘Ideally everyone should have their income protection policies to run right up to their expected retirement age, whenever that is.

‘The longer your policy runs for, the greater protection that affords you and your family to know that if you are incapacitated, financially you will be secure.’

To find out more about this type of cover and work out the appropriate level of cover to suit your budget and family, it is recommended that customers consult a financial adviser. 

This is Money’s protection insurance Cavendish was chosen as it can refund all commission on life insurance to get our readers the best deal possible, it also offers income protection insurance but says due to the product’s nature this cannot be compared online and people should speak to one of its advisers.

> Find out more about income protection with our partner Cavendish Online  

THIS IS MONEY’S FIVE OF THE BEST PROTECTION INSURANCE DEALS

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