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Income protection insurance

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Most of us need to work to pay the bills. The mortgage, credit cards, electric, phone, water, council tax and the rest. The bills don't stop, even if we are very sick. If you lost your income for months or years, your savings and state benefits would probably not cover your living costs. You have a one in seven chance of being off work for 6 months or more due to illness or accident during your working life. Being diagnosed with cancer often means extra costs such as transport to and from hospital for regular treatment, at the very time income is reduced with time off work.

Employers

By law, an employer must pay most employees statutory sick pay for up to 28 weeks, few will pay for longer. This will almost certainly be a lot less than your full earnings. If it is obvious you can never return to work, they may stop paying and terminate your employment. 

Self-employment 

If you are one of the increasing numbers of self-employed workers in the UK, then apart from monies owed, nobody pays you when you are off sick. It can be harder for the self-employed to get state benefits than for employees.

What long-term income protection insurance covers

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. Long-term income protection pays out a monthly income if you cannot work because of illness or disability. Most policies pay out until you either recover or reach retirement age but others are for a set number of years.

What short-term income protection insurance covers

Many income protection/mortgage protection/payment protection/creditor policies only pay out for between three months and a year, some can extend to two years. These are fine to help you for a short period without income, but not if you have a longer term problem such as cancer that stops you working.

It is not payment protection. Payment protection insurance covers the repayments on a mortgage, loan or credit card if you are unable to work due to accident, sickness or unemployment. Many only pay for 12 months. Income protection is longer term. 

When income protection insurance pays out

Policies only pay out when you are not working at all. Some will offer reduced payments when you are back to work part-time or doing less stressful work. If you are having treatment but still working, they will not pay a claim.

Amount covered

You should select the level of monthly income which will allow you to pay your bills and carry on with a reasonable lifestyle. There are limitations on what insurers will pay, linked to your normal income, so you cannot be better off than when working. The maximum amount of cover you are allowed to take out is usually about half of your gross annual earnings.

Some insurers make it easy to see what you will get. Others can make things confusing by saying that you’ll get £X per week but what the insurer pays will be decreased by whatever amount you are getting from other sources such as sick pay from your employer and state benefits. If you cannot understand what exactly an insurer will pay you if you claim, then ask or go to one that makes it clear.

Waiting period 

There may be a waiting period before the payments start, which can be from four weeks up to a year. This is the time between when you are ill and when the insurer begins to pay you a monthly income.

Price 

The price will depend on the amount of cover you need, your age, your work, the length of the waiting period and your planned retirement age.

People with cancer 

If you have or have had cancer, insurers will usually refuse to offer cover. Some insurers may refuse cover if family members have a history of cancer. 

Specialist policies 

A few specialist insurers will consider cover for those who have or have had cancer, but this cover is hard to find and can be expensive.

Pre-existing medical conditions 

You may not be able to make a claim for an illness you already have or have had before. 

Differences

There are many different policies with small variations that could mean the difference between being able to claim in full and getting a reduced pay-out, or even nothing.

Not covered 

This varies by insurer but the main ones are:

  • Disability due to, or caused by, HIV/AIDS.
  • Normal pregnancy and childbirth. 
  • Failure to follow medical advice.

Extra help

An increasing number of income protection policies include online and telephone advice. Insurers recognise that just paying cash is only one element of helping to protect your income. Many insurers offer back to work support that may include help in getting physically better, retraining and assistance in getting a new job.

Proportionate benefit

Some policies include a proportionate benefit to pay a partial income if you go back to work on a part-time basis. This accepts that few people can suddenly go from having months or years away from work, and instantly return to full time work, particularly if they have some form of permanent disability.

Age 

Insurers usually cover people from 18 up until a few years before retirement, and some will not cover anybody over 55.

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Download our free PDF guide

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  • Health insurance and cancer
  • Cancer cash insurance
  • Travel insurance for cancer patients
  • Critical illness insurance
  • Income protection insurance

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