What is Income Protection Insurance?

In its simplest terms, Income Protection does what it says on the tin: it protects your income if you lose your job unexpectedly, or are unable to work because of an accident, illness or injury.

By paying a tax-free monthly sum straight into your bank account, this type of insurance acts as a financial safety net, making sure you can still pay the bills, even without a regular wage or salary.

If you’ve never considered Income Protection insurance before, you may not be sure whether it’s something you need, especially if you haven’t ever been affected by redundancy, or needed to take an extended period of time off work.

But have you ever thought about what might happen if you lost your job, or suffered an illness or injury and were unable to work?

If your regular wages were to suddenly stop, would you still be able to support yourself and your family making sure the bills are paid and there’s food on the table?

Of course, in an ideal world, this isn’t something anyone would have to worry about. But sadly, in our increasingly uncertain economic and political climate, it’s impossible to predict what might be around the corner.

Recent research by the Office for National Statistics (ONS) has shown that as many as 41% of people will be made redundant or need to take time off for an illness or injury during their working lifetime. Even more worryingly, the statistics show that when it comes to savings, a quarter of UK households have less than £95 in savings to fall back on.

In the event that you’re made redundant, Job Seeker’s Allowance does offer a partial solution, but at less than £75 a week for adults over the age of 25, for most people this wouldn’t be enough to cover even the most basic outgoings.

When it comes to accident or sickness, many employers don’t offer company sick pay, but UK residents are entitled to Statutory Sick Pay (SSP). However, similar to Job Seeker’s Allowance, this pays out less than £95 per week – nowhere near enough to cover the average monthly cost of renting a home.

Fortunately, this is where Income Protection insurance can help. Covering a percentage of your gross monthly income, this type of insurance is a bit like an emergency life-jacket, or an old-fashioned rainy day fund.

The idea is that the monthly benefit payments help cover essential financial outgoings, leaving you with the time you need to rest and recuperate from your illness or injury, or in the case of unemployment, look for another job that’s suited to your skills and expertise.

Because the monthly instalments you receive will only be paid for up to 12 months per claim, Income Protection is known as short-term insurance.

When you buy Income Protection, you’ll be asked to choose a benefit amount (how much you’d like to be paid each month). The amount you receive depends on how much you earn, but can be anything up to 65% of your gross annual salary.

When choosing a benefit amount, it’s important to remember that you don’t need to go for the maximum that’s available to you. If you make a claim, your monthly payments are designed to cover a percentage of your income, but not all of it.

You should select an amount that’s just enough to cover your essential outgoings – things like rent, household bills, food and drink – until you return to work or find a new job.

Before you buy a policy, it’s a good idea to work out your basic monthly outgoings, as this will give you an idea of the benefit amount you’ll need.

When affected by redundancy, or recovering from an illness or injury, most people find that they naturally cut back on spending, and are able to get by on much less than they usually would.

Because the payments are tax-free, and are paid straight to you, they don’t need to be tied to any kind of financial commitment, such as a loan or mortgage agreement.

Most people use the money to cover everyday living costs, or to make sure they don’t fall behind on rent, but you are free to spend your benefit payments however you wish.

To be eligible for Income Protection, you need to be aged between 18 and 64, and a permanent resident of the UK, Channel Islands or Isle of Man.

As long as you’ve been working full-time (more than 16 hours a week) for the same employer for over 6 months consecutively, you should be able to buy a policy.

To find out more about Income Protection insurance, or to purchase a policy, speak to one of our advisors today. As experts in Income Protection, they’ll compare quotes from the best insurers on the market to find the right type of cover for you.