Legal 101

A guide to income protection insurance

Amber AkhtarAmber Akhtar
Last updated on:
February 3, 2022
Published on:
December 19, 2021

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Income protection insurance, otherwise known as income protection cover or employment protection insurance, may provide you with alternative income and peace of mind if ever you are unable to work due to illness or an unfortunate accident.

Currently gov.uk states that Statutory Sick Pay (SSP) must be paid for up to 28 weeks of sickness (which includes physical and mental health illnesses). If your employer offers company sick pay this may also offer you a solution to cover your bills in any period of sickness absence, but where this is not an option, after 28 weeks you may find yourself struggling to cover your bills.

Income protection insurance aims to provide you with a source of regular income and may continue until you return to work or retire. Although it may not be the same amount as your monthly income, it covers a substantial proportion of what you would expect to receive and offers financial support whilst you are off due to ill health. The reason for the shortfall is because the money paid through the premium is tax-free and a proportion of the payment will be deducted to cover benefit payments you may be in receipt of.

Depending on the terms of your insurance you may have to wait up to 4 weeks of a sickness absence before you can receive any payment through the insurance. This delay is because you may be entitled to company sick pay and/or statutory sick pay.

But do I really need income protection insurance?

Before you decide on whether to take out an income protection insurance policy, consult your employer as you may be entitled to income protection insurance through work. You may also find you have existing policies that offer income protection as an additional benefit (some mortgage policies cover for serious illness). Alternatively, you may wish to rely on savings or family to cover your outgoings. However, this may not offer the best solution if you are facing a long period of sickness.

Types of Income Protection

  • Accident, Sickness and Unemployment

ASU is a form of income protection that pays a tax-free proportion of your lost monthly income whilst you recover. You are required to pay a premium each month, in the event of an accident, sickness or unemployment, you will have peace of mind your monthly income will continue to come in for an agreed period of time (for 12/24 months depending on your agreement).

  • Payment Protection Insurance

PPI aims to cover monthly debt repayments (loans, mortgage and credit cards) where you are unable to work due to illness, involuntary redundancy or in the event of an accident. This policy is usually short term and depends on the level of cover agreed with the insurer.

  • Mortgage Payment Protection Insurance

MPPI is designed to ensure your mortgage payments are covered in the event you are unable to work due to accident, sickness and unemployment. You are eligible to apply for MPPI if you are employed or self-employed. The level of your cover will depend on what is agreed on at the outset and how much you agree for the policy to pay out each month.  

  • Critical Illness Insurance

Critical illness covers a limited range of illnesses for a shorter period of time and provides individuals with a lump sum if they are diagnosed with a particular illness or disability. Although you may still receive other income such as benefits or sick pay from your employer, this level of cover ensures you are protected and have the option to boost your income.


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Income Protection Policy Premiums, Exclusions and Process

The cost of income protection insurance monthly premiums can be high and it may be the case that you never need to use it. It is important you check the terms of each insurance policy carefully to ensure it meets your requirements.

There are exclusions for insurance policies and you may find not all illnesses are covered. When taking out a policy you may be asked to provide your medical history, any illness you or your family have previously suffered from may also be excluded (also known as ‘pre-existing medical conditions’).

Once you have decided on which insurance policy you will be taking out, your insurer will require full details of you and your family’s medical history. Your insurer may refuse to pay out any premium if you fail to disclose any relevant information. You may find some insurers are prepared to cover pre-existing medical conditions and so it is important you do your research before deciding on a suitable insurer.

The insurer will want to know the lifestyle you lead, whether you have any dangerous hobbies or interests and whether you smoke, drink or take drugs regularly. If you are already ill you may not be able to get income protection insurance or may be required to pay a high monthly payment.

Working out the level of cover

When assessing how much cover you need for income protection insurance you will need to:

  • Determine how much your monthly take away pay is
  • Deduct any benefits you receive
  • Deduct work related costs (travel, food, clothing)
  • Add on extra expenses you may need due to illness/disability

This will provide you with an approximate figure of how much cover you will need each month to cover your finances. Income protection insurance can be taken out with a financial adviser who will browse the market for available policies and suggest the policy best suited for you. You may also contact an insurance company directly for assistance, there are a number of insurance providers available and you may want to use a comparison site to find the best option for you.  

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The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.

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