Specialist Income Protection Insurance

Understanding Income Protection Insurance

Income Protection Insurance (sometimes referred to as “Permanent Health Insurance”) is a product that steps in financially if you are unable to work because of an accident or illness. The insurer typically pays a percentage of your pre-tax earnings—often between 50% and 70%—until you return to work or until the policy ends, depending on the terms. Unlike short-term policies that pay for only a limited time (e.g., 12 or 24 months), some Income Protection plans can extend payments for the entire duration of your incapacity, potentially up to retirement age.

Key Features

• Regular monthly benefit: You receive a payout each month instead of one lump sum.
• Tax treatment: In most cases, if you pay your premiums personally (out of post-tax income), the benefit you receive is tax-free under current UK rules.
• Own occupation vs. any occupation: Many comprehensive Income Protection policies pay out if you can’t do your specific job. Others only pay out if you can’t do any job, which can be more restrictive.
• Deferred period: This is how long you must wait after you become unable to work before benefits start paying out. Common deferred periods range from 4 to 26 weeks, though policies can offer flexibility up to 52 weeks.

Who Needs Income Protection?

Anyone reliant on their own regular earnings to cover living costs could benefit from Income Protection. However, certain groups often find it especially beneficial:

Self-Employed and Freelancers

Without an employer’s sick pay, your business income may drop to zero if you can’t work. Having a policy can help safeguard you against unpredictable gaps in cash flow.

Primary Earners in a Household

If your salary covers essential bills like mortgage or rent, utility costs, and groceries, losing it could place your family under significant financial strain.

Those with Minimal Sick Pay

Even many full-time employees may only get Statutory Sick Pay (SSP) from their employers, which is often insufficient to maintain existing commitments.

High-Risk Occupations

Jobs that involve physical labour or higher accident risk might make you more likely to be off work due to injury or illness.

Beyond these scenarios, anyone who wants extra financial security and peace of mind could consider Income Protection to shield themselves from the financial shock of a prolonged absence from work.

Types of Income Protection Policies

There is no one-size-fits-all approach when it comes to Income Protection. Policies often vary in terms of their structure and how benefits are paid out. Common variations include:

Short-Term vs. Long-Term

• Short-term: Provides coverage for a set period (e.g., 1, 2, or 5 years) when you’re unable to work. Premiums tend to be lower, but if your health setback extends beyond the time limit, benefits cease.
• Long-term: May pay out until a specified age (like 65 or 70) or until you can return to work. This offers more comprehensive coverage but typically comes with higher premiums.

Guaranteed Premiums vs. Reviewable Premiums

• Guaranteed: The insurer cannot alter the premium after the policy starts, giving you predictable costs over time.
• Reviewable: Premiums can change after set periods, perhaps in response to the insurer’s claims experience or economic factors. This can make it cheaper initially but less predictable in the long run.

Level vs. Increasing Cover

• Level: The benefit and premiums remain fixed.
• Increasing: The benefit (and often premiums) rise annually, typically in line with inflation, helping preserve the policy’s real value over time.

Important Policy Features

Deferred Period

The amount of time you wait after becoming ill or injured before payments begin. Typically, the shorter your deferred period, the higher your premiums. This is because the insurer is more likely to pay out if benefits start sooner. People with robust employer sick pay or savings may opt for a longer deferred period to reduce premiums.

Benefit Amount

Your chosen benefit usually ranges from 50% to 70% of your gross salary. Policies rarely pay out 100% of income because they aim to keep incentives to return to work if possible.

Definition of Incapacity

• Own Occupation: You’ll receive payouts if you’re unable to carry out the duties of your specific profession.
• Suited Occupation: Payments only come if you’re unable to work in your usual occupation or a job that suits your experience, education, or training.
• Any Occupation: The strictest definition, requiring you to be incapable of doing any form of work whatsoever.

For the highest degree of certainty, many people prefer an “own occupation” definition.

Claims Support and Rehabilitation

Some insurers provide extra benefits, such as rehabilitation services, mental health support, or partial payouts if you can only return to work part-time. These added-value benefits can speed up recovery or provide a gentler transition back to full-time responsibilities.

How Income Protection Differs from Other Policies

Life Insurance

Pays a lump sum (or regular payments) to beneficiaries upon your death or, in some cases, earlier if you’re diagnosed with a terminal illness. It doesn’t protect you if you’re alive but unable to work.

Critical Illness Cover

Pays a lump sum if you’re diagnosed with one of a list of specified serious illnesses (e.g., certain cancers, heart attacks, strokes). Although useful, it won’t pay out for conditions not on the list or for long-term incapacity that isn’t triggered by those specified conditions. It also doesn’t offer ongoing monthly payments over a prolonged incapacity.

Private Medical Insurance

Helps with private healthcare costs, but doesn’t replace lost income. You might have speedy access to treatments, but if you can’t work for a significant period, you’re still left without earnings.