What is Income Protection Insurance?
Making sense of income protection: What’s covered, and do you really need it?
If there’s one thing you need to rely on, it’s your income. Your earnings are vital, and probably the single biggest deciding factor when you take out a mortgage – so you don’t want to lose it. But what happens if you get sick and your income suddenly stops? Well, that’s where income protection insurance comes in.
When you’re buying a house – or when you already own one – it feels like people are trying to flog you insurance left, right, and centre. Read on to discover exactly what income protection insurance is, when it might come in handy, and if it’s something you should be thinking about taking out.
Everyone’s circumstances are different, so if you’re not sure which policy or level of cover you should be looking at, chat to one of our specialist Purplebricks Protection advisors – we’re experts when it comes to this type of cover.
What is income protection insurance?
Income protection insurance pays out a regular, tax-free sum if you can’t work due to an illness or accident. It doesn’t cover all of your earnings though, usually you’ll get between half to two thirds of your regular salary amount (before tax).
Important information
For insurance business we offer products from a choice of insurers.
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1% but a typical fee is £299.
Do I need income protection insurance?
Income protection is a good idea if you want a safety net in place if you’re no longer able to work. People often don’t think they’ll ever need income protection insurance – but if your circumstances do suddenly change, it’s a relief to have your expenses covered. With a high cost of living squeezing everyone’s pockets, it’s a good idea to first figure out whether you’d be able to afford your current bills and payments without a regular salary.
Whilst there is the option of state benefits, they often don’t provide all the support you’d need to pay your bills. Statutory Sick Pay is currently at £109.40 per week (as of March 2024), and you may find it tricky to stretch this payment to cover all of your costs without an additional income. If you think you’d struggle to keep up with important payments like a mortgage, your rent, or your bills without your current earnings, it might be something to think about.
Income protection and mortgages
Although you don’t need income protection to take out a mortgage, it’s something to consider. As your mortgage is one of your biggest – if not the biggest – monthly outgoing cost, it makes sense to consider taking out earnings protection. This ensures your mortgage payment can still be covered if you stop working due to illness or injury. If you’re not able to keep up with your mortgage payments for any reason, you risk losing your home.
How does income protection insurance work?
If you’re not able to work anymore due to an accident, injury, or illness, income protection insurance payments kick in to replace part of your earnings. Usually 50 – 65%. It pays out until you’re either able to work again, you retire, pass away, or the policy term ends. Whichever comes first.
They don’t always start right away though. Your policy documents will spell out how long the gap is between when you stop working and when the payments begin – called the deferred period. This could be anything from seven days up to two years. As a general rule of thumb, the longer the pause, the lower the premium.
Broadly, if you have an illness or injury that means you can’t work, you’re covered. This can be for a long time, or as a short-term solution. There are two key types of income protection insurance:
Short term
The more affordable of the two options, short-term cover, has a maximum claims period – usually one or two years. It’s designed to temporarily replace a portion of your earnings. Like it says on the tin, short-term income protection insurance covers you for a set period, so isn’t suitable for serious health conditions that could keep you off work for a very long time. However these types of policies can work well as a lower-cost solution for some.
Long term
Long-term income protection cover is slightly different. Although it still covers you for a percentage of your monthly income, it does so for much longer. In fact, most long-term policies will cover you right up until retirement (this is why they can often cost more).
Long-term cover has three levels – ‘own occupation’, ‘suited occupation’, and ‘any occupation’. So, what’s covered by each level of income protection insurance?
Own occupation: This is usually the most comprehensive level of cover – and the most expensive. It means your policy will pay out if you can’t do any aspects of your own job due to an illness or injury. Generally, your claim is more likely to be successful with this level of cover.
Suited occupation: A step down in cover, suited occupation policies pay out if you can’t do your job or one that suits your qualifications and experience. If your insurer thinks you could continue working in a different job that suits your skillset, they won’t pay out.
Any occupation: This is the lowest level of earnings protection, as it pays out based on whether you can complete certain tasks. If an injury or illness prevents you from doing any work-related activity at all, only then will this type of cover kick in.
Ahead of taking out the policy, you’ll choose which of these levels you need to be covered for. And if you’re not sure exactly what you need, a Purplebricks Protection advisor can help you work out the best cover for your circumstances.
Income protection when you’re self-employed
There’s been a lot of talk of salaries – but you can still take out income protection insurance if you’re self-employed. Similar to a salaried worker, you can claim for about half to two thirds of your average monthly income. You’ll decide what this number looks like with your insurer, alongside the deferral period and other specifics. To apply for this type of cover, you need to be a sole trader, limited company, or in a partnership.
Many self-employed people take income protection out as they don’t have the backup of an employer paying out sick leave if they need to take time off.
Are there other types of illness insurance?
Good question – there are loads of insurance types, so it’s easy to start wondering just what you need. Stay in the know by exploring every option for illness insurance, as income protection isn’t the only one. There are other types of insurance, like critical illness cover, but keep in mind it also comes with different coverages and restrictions.
If you’re not sure which type of cover is best for you, that’s understandable, it’s a big market. Ease your mind by talking it through with a knowledgeable Purplebricks advisor who can help you assess your circumstances so you get what you need.
Quick fire tips:
Make a list of your monthly expenses and tally them up. Having a number in mind before you start browsing for the best income protection will give you an idea of the level of cover you’ll need – and ensure you’re not paying for too much or too little.
You need to be honest when you apply for income protection insurance – don’t miss anything when you’re answering the insurer’s questions. If you do end up making a claim, any discrepancies could mean the insurer doesn’t pay out.
Most policies have a waiting (deferred) period and won’t pay out immediately. Oftentimes, the longer the wait, the cheaper your premium.
The job you do can impact your premium. Insurers will assess how dangerous your line of work is and charge accordingly – so it’s worth browsing around.
Some providers offer lower premiums if you keep up a healthy lifestyle. Regular medical check-ups, keeping in shape, and trips to the dentist are all factors that can impact the price tag on certain policies.
If you’re thinking of cancelling, getting replacement cover can be pricey, as premiums increase with age. You also might struggle to get new cover for any pre-existing conditions.
Work with a trusted advisor. Talking it through with someone who knows the ins and outs of income protection insurance, and understands exactly what you’re after, is a sure-fire way to ensure you’re protected at the right level, for a competitive price.
Secure your insurance for income protection
You wouldn’t get very far without your earnings, so it’s understandable if you’re thinking about pinning down a good level of income protection insurance.
For salary protection insurance that suits your current lifestyle and budget, get in touch with an experienced Purplebricks Protection advisor. They’ll do the heavy lifting. As in, search through the various policies, levels of cover, and different rates, and find you the income protection insurance you’re after.
