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Income protection insurance – is it really worth it?

Income protection insurance - is it really worth it Family reading book together

Are you thinking about income protection insurance?

Perhaps you’ve heard it mentioned as you look into a new mortgage? But what exactly is income protection insurance? What is it for? And – most importantly – with so many other demands on our finances, is income protection insurance really worth it?

Our expert guide is here to answer all these questions! We’ll look at:

  • What is income protection insurance?
  • What does it cover?
  • Who is income protection insurance for?
  • How much does it cost?
  • How much will an income protection policy pay out?
  • When will it pay out?
  • What’s the difference between income protection and other types of insurance?
  • Is income protection insurance really worth it? – An independent view
  • What to consider before taking out income protection insurance

What is income protection insurance?

Income protection insurance, also known as permanent health insurance or IP insurance, is an insurance policy which provides regular payments if you’re unable to work due to illness, injury or disability. Policies are typically over a long term, with payments usually made until either your return to work, retirement or – if before retirement age – death. Some providers do offer shorter term policies; these have a term of one or two years and have lower premiums.

But, how do you know if income protection insurance is really worth it? Let’s take a closer look:

What does income protection insurance cover?

Income protection insurance covers most illnesses or injuries that leave you unable to work. It doesn’t cover you if you are made redundant.

Who is income protection insurance for?

Anyone over the age of 18 who is working for an income can apply for income protection insurance. Applications are not usually accepted beyond retirement age.

How much does income protection cost?

There’s no straightforward answer here, as premiums are determined by numerous factors. These are all particular to the individual applicant and therefore to the details of their policy.

Personal factors

An applicant’s personal factors include:

  • Your age
  • Current health
  • Family medical history
  • If you smoke or not
  • Your job or type of work

Your job or type of work is an important factor, as the riskier your occupation the more chance there is that you’ll make a claim. Those with the riskiest jobs are likely to pay the highest premiums. Income protection insurance providers generally group jobs into categories of risk. There are four standard groups, though some providers may use more. It’s possible that different insurers may class the same occupation in different groups, so be sure to consider this if you’re considering income protection.

  • Group 1 – Examples include professionals, office workers, staff with low business mileage
  • Group 2 – Examples include skilled manual labourers, engineers, shop assistants, staff with high business mileage
  • Group 3 – Examples include skilled manual labourers, care workers, teachers
  • Group 4 – Examples include heavy manual labourers, bartenders, construction workers, mechanics
Policy cover factors

Premiums are also affected by the policy you require, including the level of cover and the length of deferral period before payments start. The shorter the deferral period, the higher the premiums. When considering your deferral period, you need to think about any sick pay that may be available to you through your employment, or statutory sick pay.

The amount of cover you take out is based on a percentage of your regular income – this is usually between 50% and 70%.

How much will an income protection insurance policy pay out?

Again, there is no single answer – each policy is agreed on an individual basis. Generally, payments will be 50% to 70% of your gross salary. Some providers offer policies which offer a higher percentage on a set amount of your earnings and lower percentage on the remainder.

Let’s look at an example:

You currently earn £30,000 a year (before tax), and your income protection policy will pay out 55% of your salary:

Annual income £30,000
Monthly pay-out £1,375
Total pay-out per year 16,500

It’s important to note that the payments from the policy are income tax free, however policy payments may affect any benefits that are calculated on your regular income.

Index-linked income protection insurance

Imagine that you’ve taken out income protection insurance based on the example above, with a policy paying out 55% of your current £30,000 income. Now imagine you’ve fast-forwarded 12 years; your annual income has increased with inflation to £38,000. If you make a claim at this point, you will still only receive 55% of your original £30,000 income – £16,500 per year, rather than £20,900 based on your current income. Given general inflation and the rising cost of living year on year, £16,500 per year will be worth less and less relatively.

The answer could be an index-linked income protection insurance policy. This means that your policy rises each year with a measure of inflation – this could be the retail prices index (RPI) or consumer prices index (CPI).

When does income protection insurance pay out?

There are three things to know here:

No cap on the number of claims

You can claim on your policy more than once – as many times as you need to, in fact – if the policy is still in force. If you reach the end of your policy there is no pay-out, and it’s not possible to cash-in your policy at any time either.

Deferral periods

Firstly, all policies have a deferral period. This is usually either 4, 8, 13 or 26 weeks but can be as long as two years after you have submitted your claim to your insurer. The minimum period is four weeks.

This deferral period will have been agreed with you when taking out your policy, and as mentioned above, the longer the deferral period, the lower your premiums.

Defining your inability to work

How your income protection insurance provider defines your inability to work will determine if your policy pays out, and when this will be. It’s important to consider this when comparing policies. Commonly, one of the following three indicators are used:

  • Activities of daily living
  • Suited occupation
  • Own occupation
Activities of daily living

This indicator looks at your ability to do basic day to day activities, such as walking, showering or writing – if you are unable to carry out a certain number of these, your policy pays out. This was more commonly used for older policies, and policies using this indicator may be cheaper. However, you may find that you are unable to do your job but that you can still carry out these basic activities. In this situation, your provider may argue that you could still do some kind of work and therefore refuse to pay out.

Suited occupation

When your insurer has accepted that you can no longer carry out your own job, this indicator considers your ability to do a similar role – i.e., a role that you are suited to. This is a better type of policy than one based on activities of daily living, but you may still find that a claim is refused – for example, if you can no longer manage a physically-demanding customer-facing role your insurer may argue that you could move to an office-based customer-facing role.

Own occupation

This indicator is more self-explanatory – your insurer will pay out if you cannot carry out the job that you were doing at the time of your claim. This is best type of policy as it provides the highest level of protection.

Is income protection insurance the same as PPI or Critical Illness Cover?

The short answer: no; these are three different types of insurance. We’ve discussed income protection insurance in detail – here’s an outline of the other two:

PPI, or payment protection insurance, only covers the repayments on a specific debt, such as a loan.

Critical illness cover offers financial support by providing a one-off lump sum if you fall seriously ill (the illness must be covered in your policy).

Income protection insurance – is it really worth it?

So, to the big questions – is income protection insurance really worth it? Can you justify the expenditure on premiums, even if you’re on a lower salary? Is it really worth it if you already have a good chunk of savings in the bank?

To answer this, you need to ask yourself:

Do you have any plans in place for if you fall ill and can’t afford to pay your bills?

If you’re employed, does your employer offer occupational sick pay, beyond statutory rates?

Statutory sick pay is currently set at £94.25 per week and can be paid by your employer for up to 28 weeks. Some employers do offer sick pay beyond statutory rates, but few support staff for longer than a year.

If you’re self-employed, what would happen if you were injured or too ill to work?

Would you be relying on savings? Or relying on a spouse or family member for support?

Is income protection insurance really worth it?

If your employer doesn’t offer an additional sick pay package, you’re self-employed and don’t receive any sick pay at all, or if you rely on your health to earn your income then income protection insurance is a good option to consider, ensuring that should the unthinkable happen, you’ll be covered.

Even if your employer does offer additional sick pay beyond the statutory rates or 28-week period, you need to consider how you would manage financially should you be forced out of work on a longer term. Falling back on savings could be an option for those savers amongst us, however you do need to consider if you can realistically save enough to live on for an indefinite period. In addition, should you suffer an emergency between now and any incident leaving you unable to work, you may find your savings already seriously depleted.

An independent view

Consumer association Which? suggests that, given the low value of state support available, “everyone of working age should consider income protection”. A recent study carried out by Which? found that just 9% of respondents had some form of income protection insurance in place, compared to 41% with life insurance and 16% with private health insurance.

It seems that we understand the need to provide safeguards and protect ourselves, but according to Which?, “the one protection policy every working adult in the UK should consider is the very one most of us don’t have – income protection”.

What to consider before taking out income protection insurance

Is income protection insurance really worth it? At Stisi Group, we agree with Which? – it makes sense to protect yourself and your family from the unexpected and having a financial plan in place can relieve stress and anxiety.

It is however important to consider the following:

  • Which level of cover do you really need?
  • Can you afford this level of cover?
  • Make sure that you don’t already have income protection insurance cover through your benefits as an employee
  • Do you have any kind of illness insurance already in place, combined with another policy or your mortgage?
  • Would another type of illness insurance – such as critical illness cover – suit your needs better than income protection insurance?

We believe it’s really important to look for professional advice to work out which type of income protection is right for you and your needs. Your financial adviser will be able to listen to you, help you determine the level and type of cover that is most appropriate for you, and then provide quotes from across the market.

Stisi Group are here to help

Our team at Stisi Group are friendly and professional, and trusted protection experts – get in touch if you’d like to ask any questions, chat through the options available to you or book a free appointment.

You can call us on 0131 510 1240 or email info@stisi.co.uk. We love visitors to the office, so if you’re local, why not pop in – we’re at Stuart House, Eskmills Business Park, Musselburgh, EH21 7PB.


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