A Guide to Income Protection Insurance

Everything you need to know about income protection insurance

 Campaign Creators on Unsplash

Campaign Creators on Unsplash


Income protection insurance provider Cavendish Online share their comprehensive guide on income protection cover - with FAQs and answers. Find out more about Cavendish Online here.

What is Income Protection Insurance?

Income protection insurance is a policy that pays a monthly benefit to you if you’re unable to work because of an illness or injury. It’s sometimes referred to as ‘permanent health insurance’, as it’s designed as a long-term policy that ensures you’ll continue to receive a regular income until you retire or you’re able to return to work.

Unlike critical illness insurance (which pays out a one-off lump sum if you have a specific serious illness) income protection insurance pays out a monthly percentage of your take-home pay (or gross salary). Usually, this is up to 70% of your salary, however it depend on the insurer and the conditions of the policy. It’s worth noting that income protection doesn't typically include cover for redundancy - however there are other types of policies that can take this into consideration.

Income Protection is there to support you in your time of need, however it’s not designed to improve your financial position if you’re unable to work. There are also restrictions in place for how much cover you can have.

Why should I buy it?

Regardless of whether you have children or other dependents – if an illness meant you couldn’t pay the bills, you should consider income protection insurance. It’s also especially important to consider purchasing if you’re self-employed.

Top frequently asked questions - with answers

When does income protection pay out?

It pays if you’re unable to work due to disability or illness and lasts until you’re able to start working again - or until you retire, pass away or the policy term comes to an end (whichever is sooner). There’s often a waiting period before the payments start - usually a minimum of four weeks, however payments can start up to two years after you stop work. Generally, you’d set payments to start after your sick pay ends, or after any other insurance stops covering you. The longer you’re prepared to wait, the lower your monthly premiums will be.

What illnesses or injuries does income protection cover?

It covers most illnesses that leave you unable to work in either the short or long term, depending on the type of policy and its specific definition of incapacity. What’s the difference between income protection and critical illness cover? Both kinds of policies provide you with financial support if you have an unexpected illness or injury, with no restrictions on what the money is used for, however there are some key differences. Critical illness cover pays out a one-off lump sum if you’re diagnosed with (or have surgery for) a specified, potentially life-threatening illness (as listed in your policy documents). Generally speaking, conditions that aren’t considered life-threatening are often excluded from critical illness insurance. Income protection, on the other hand, offers a much wider range of cover for illness and injuries. Another key difference is that it provides a percentage of your salary as a regular payment if you can’t work due to illness or injury - bridging the gap until (or if) you return.

What’s the difference between short-term & long-term income protection?

Short-term income protection is a form of income protection that pays out for a (short) set period of time, usually between 1-2 years, but it can be up to 5 years depending on the provider. Because it pays out for a shorter period than long-term income protection, the premiums are often considerably cheaper. Long term income protection will normally cover you all the way to retirement, or the age at which you choose for the policy to finish when you take it out.

What level of income protection insurance do I need?

To work out the level of cover you need for income protection insurance, first, start with how much your monthly pay is (before tax and other deductions). Once you know this figure, think about how much money you might require if you were to become ill or disabled. Everyone’s needs are different, so think carefully about what would work best for you and your loved ones.

Do I actually need income protection insurance?

Before you think about taking out a policy, it’s worth understanding whether or not you get income protection insurance through your work. Your employer may offer this as a benefit, so it’s worth checking your contract or with your HR person at work. Note, if you leave your job in the future it’s not likely you can take the cover with you and the benefit would be lost. It’s also worth considering whether or not you’d be prepared to use any savings that you have instead of insurance - however, you need to think very carefully about whether you want to rely on savings as you might not be able to save enough to cover a longer period of ill-health.

Tips for buying income protection insurance

As income protection insurance covers a wide range of illnesses, it has the potential to pay out for many years. The amount you pay for income protection insurance depends on the policy itself and your individual circumstances.

The cost of a policy will vary based on a number of factors, including the range of illnesses and injuries covered, the amount of your income you’d like to cover and personal details such as your occupation, age, weight, health in general and family medical history.

As with most things in life, you get what you pay for - so don’t just settle for the cheapest policy. Spend a little time to get to understand what you’re buying and who you’re buying from. Your future self will thank you for it.

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