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Income protection insurance: How it works

So, what is income protection? Income protection insurance pays out an income if you're unable to work because of illness or injury. Income protection insurance aims to put you back to the position you were in before you were unable to work. It pays a regular tax- free monthly income.

 

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 is usually translated into a maximum of 50% to 65% of your before-tax earnings.

 

As with all insurance, the trick to buying the right type is to consider exactly what it is that you need it to do for you. You need to have a very close look at the small print of any policy to make sure it will pay out when you want it to.

 

There are general long-term income repayment policies designed to kick in between when your employer stops paying sick pay, and when you collect your pension.

 

There are shorter-term policies to protect a mortgage, bank loan or other payment. These often start after a few weeks but tend to stop entirely after 12 months or 24 months.

 

Short-term policies often include unemployment and redundancy, which longer-term income protection cover does not.

 

If you're still left wondering, "What is income protection?", then read on.