Last updated: 06/10/2020 | Estimated Reading Time: 3 minutes
Income protection insurance
Our lives these days are racked with financial worries, so an income protection insurance policy that pays out a regular income in the event of illness, redundancy or anything else that prevents you from being able to work can be just what you need to get that valuable peace of mind.
In This Guide:
- What is income protection insurance?
- How does income protection work?
- Is income protection expensive?
- What alternatives are there to income protection?
What is income protection insurance?
An income protection policy is designed to help you keep up with any mortgage or debt payments you may have, as well as to keep up with day to day spending, if for whatever reason you are unable to work.
The loss of income that can occur when an accident or sudden bout of ill health strikes can be devastating for many of us, particularly when we have regular payments to keep.
Income protection is designed to eradicate this worry by paying out a tax-free regular income while you can’t work. Generally, the pay-out will be around 50-70% of the standard income of the policy holder.
How does income protection work?
When you take out an income protection policy, you’ll be asked to set a period of time known as a deferral period (usually one to 12 months) after which it can start to pay out.
The longer the period you set, the cheaper the policy, as a general rule.
The policy will then continue to pay out until you return to work, the policy expires or you retire.
Is income protection expensive?
The cost of your policy will depend on various factors about your health and the nature of the cover you require – including how long you want to be covered for.
A 25 year old requiring cover until the age of 60 will pay around £10-15 a month if they choose the maximum 12 month deferral period. If you choose the minimum (4 week) deferral period, you can expect to pay £20-40.
Until the European Court of Justice’s gender equality directive introduced in 2012, women would have paid more than men for income protection cover. The ECJ’s directive outlawed the practise of basing the cost of insurance of any kind on the gender of the prospective policy holder.
What alternatives are there to income protection?
Conventional life insurance policies will perform a similar function to income protection policies but of course will only pay out on the death of the insured party rather than in the event of a debilitating illness that temporarily prevents one from working.
Mortgage payment protection insurance (MPPI) is an option for those only wanting cover against mortgage repayments but offers somewhat more limited cover than a full income protection policy.
The same goes for general payment protection insurance (PPI) which, while having a broader scope than MPPI, is notorious for often being either mis-sold or over-priced when sold correctly.
There are a few different package options available for those wanting more than just the cover offered by a standalone income protection plan.
Many life insurance policies will come with the option of adding critical illness cover which, as the name suggests, will pay out in the event of diagnosis of one of various critical illnesses as decided at the opening of the policy. The pay-out associated with critical illness cover tends to come in a lump sum rather than in regular instalments as is the case with income protection policies.
Many providers offer the option of what is known as a ‘menu plan’, where you can combine different levels of income protection, critical illness cover and life insurance into one policy.
Whatever kind of income protection you’re after, it’s always important to shop around and to compare quotes online. Use our insurance comparison service to find out what kinds of policies are available to you and at what kinds of prices.