Income Protection Insurance Explained

27/05/2022 09:48

A great deal of us would struggle considerably to keep on top of our financial commitments, such as mortgages, rent and bills, if we were to lose our income due to an illness or injury, forced instead to burn through our savings and rack up debt in order to cope. The solution? Income Protection insurance. 

Formerly known as Permanent Health insurance, Income Protection is a policy that pays out a percentage of your annual income in the event of a rainy day, one that sees you unable to work due to illness or injury. Heralded as the one protection policy that every working adult in the UK ought to consider, Income Protection is ironically the very policy that most of us do not have. According to stats from Which?, only around 9% of individuals report that they have some form of income protection.

How does it work?

Income Protection policies are designed to pay out a percentage of your income after a specified period (known as deferment or ‘waiting period’) following an illness or injury. The length of time that the benefit will be payable depends upon whether you have a short-term or long-term IP policy. Short-term policies are typically defined as 1 or 2 years, whilst long-term policies are intended to be paid until you are able to return to work or retire. 

With an Income Protection policy, you will opt for a deferment or waiting period of between one and twelve months. After your waiting period is up, your policy will kick in and you’ll start receiving your benefit. The general rule of thumb is that the longer you opt to wait, the cheaper your policy will be.

The payments you receive as part of your IP policy tend to be based upon a percentage of your earnings, with around 50% to 70% being the standard. As it stands, IP benefit currently pays out tax-free income.
Income Protection insurance is different from Critical Illness insurance, which pays out a single lump sum if you fall seriously ill.

Income Protection Insurance Explained

How much does it cost? 

Your Income Protection policy will be calculated based upon a number of variables. 

Your health, whether or not you are a smoker, and what level of cover you need will all inform your premium. Another key factor is your employment. 

The majority of insurance companies assess an individual’s employment by grouping jobs into four categories, based upon risk. The riskier your work, the more likely it may be that you have to make a claim on your Income Protection. As a result, those on the riskier end of the working spectrum will tend to pay higher premiums. Those with health problems or who smoke are also considered as higher risk candidates, so their premium would be adjusted accordingly. 

For instance, consider the following example in order to gain some insight as to how these factors may impact your policy…

Two office workers apply for Insurance Protection. They are both 30 years of age and receive an annual salary of £25,000. Their Income Protection plan will provide a benefit of £1000 per month to age 68, with a deferment period of 3 months. If either of the office workers were to claim immediately on their policy and the claim continued to the finishing date, the total amount of potential benefit payable for each individual would be £457,000. 

The only difference between these two policies comes in that one of the workers is a smoker whilst the other is not. For this reason, the smoker’s monthly premium would start from £16.17, whilst the non-smokers premium would start from £12.87.

Who is it for?

Income Protection insurance can be a beneficial safety net for anyone, but it comes particularly recommended if you are in a somewhat insecure employment situation. 

For instance, very few employers are willing or able to support members of their staff for more than 12 months if they are off sick from work, and a great deal of employers actually offer no sickness benefit at all. 

It can also be particularly difficult to support yourself in an instance of illness or injury if you are self-employed, and therefore have no sickness benefit to fall back on. 

An Income Protection policy may not necessarily be for you if any of the following apply:

  • You have a good employee benefits package which would enable you to survive on your sick pay, i.e. a package which will pay you an income for 12 months or more.
  • You would be able to survive on Statutory Sick Pay and cover all of your outgoings.
  • You have enough savings and investments to support yourself, even if it is for a long time. 
  • Early retirement is an option for you.
  • Your partner or family would be able to support you with their own income.

Income Protection Insurance Explained

Remember, however, it’s not just about considering the minimum you need to get by. Support from your employer, from government benefits or from your own savings may indeed be able to help with your basic living costs, but would relying on these avenues alone leave you with little left over to enjoy non-essentials such as meals out, holidays, or hobbies?

It’s therefore important to be realistic about how much income you would desire in the event that you are unable to work for a prolonged period of time, and what you would be willing to go without.


Income Protection insurance could be the safety net that you one day need to fall back on. In order to find out whether an IP policy could be right for you, get in touch today and benefit from the expertise of our trusted advisers.