Everything you need to know about income protection insurance

Income Protection Data on Laptop

With so many different types of insurance out there, it can be tricky to know which is right for you and what’s actually worth the money. The job market has seen a bumpy few years, with companies from Accenture to TripAdvisor making very public layoffs. In fact, more than £50 million was paid out in income protection benefits in 2022. 

During tough times, it’s always a good idea to explore your income protection options so that, if the worst were to happen, you could still afford the essentials like rent or mortgage payments and food. Here’s everything you need to know about income protection insurance so you can make an informed decision.

What is income protection insurance? 

Income protection is a type of insurance benefit that covers employees financially in the event that they become unable to work. This could be due to sickness, injury or a disability – it covers most illnesses that leave you unable to work, either in the short or long term. 

Income protection pays out a percentage of your earnings before income tax, typically between 50% and 70%. Even better is that you won’t be charged income tax on the payments. Plus, you can claim as many times as you need to while the policy lasts.

How does it work? 

The way it works is simple. If an employee opts into income protection insurance, they’ll be paid a regular income for as long as they're unable to work or until they retire. This helps to protect them against any loss of income during an already difficult time.

How much does it cost?

Different insurance providers will be able to offer you different levels of cover at varying costs. Generally speaking, the cost is affected by:

  • Your age
  • Your occupation
  • Whether you smoke or have smoked
  • The percentage of income you’d like to cover
  • The waiting (or 'deferred') period until the policy pays out
  • The range of illnesses and injuries covered
  • Your health (both current and medical history)

As a rule of thumb, if you’re 35 years old, you could expect to pay around £35 a month for your income protection premium.

Bear in mind that the price you pay will also depend on whether you choose a standard premium, which the insurer can increase over time, or a guaranteed premium, which stays fixed for the duration of the policy.

What to consider before taking out a policy

Deciding whether income protection insurance is right for you is a very personal choice. Here are some things to think about before you opt in:

  1. What would happen if you got ill and couldn’t afford to pay your bills? 

Maybe you have savings to fall back on, but given the average adult had just over £6,000 in savings in 2020, this might not be sufficient to cover you for a long time.

  1. If you’re employed, can you rely on sick pay and how long is this paid for? 

Check your employment contract for details of sick pay, as this may only be Statutory Sick Pay, which is just £99.35 per week.

  1. If you’re self-employed, what would you do if you couldn’t work?

Self-employed people enjoy fewer benefits than those who are employed by a company, so they’re often worse off if something bad were to happen.

  1. Can you afford the level of cover you’ll need?

Your premiums need to be affordable but you also need to be sure that the policy will cover your bills if you do make a claim. Review your monthly income and outgoings to see how much you can afford to pay for insurance.

Income protection vs key person insurance

Income protection and key person insurance are very different things. Key person insurance, which pays a lump sum to the business if a significant team member dies or can no longer work, works in the company’s best interests. Income protection, however, works in an individual’s best interests as they receive the payout directly if they’re unable to work.

If you’re thinking of offering income protection insurance as part of your employee benefits package, Ben can help. We work with a range of leading providers, like YuLife and Anorak, to find the right benefit for your employees. Our onboarding team is on hand to make sure all staff are set up properly, and all admin work is taken care of – including if you offer various levels of coverage or dependent enrolment. Take a look at our benefits catalogue to see what’s on offer.

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