Income protection - Our top 7 most commonly asked questions

One of the things we aim to do is raise awareness for the need of protection insurance, including income protection. We’ve found that some of the reasons people don’t have income protection is because there’s still unanswered questions or they’re not quite sure what it is. 

At the moment with the cost of living crisis the idea of paying for something that isn’t “essential” is probably not high on your list of things to do, but reading this article should help you to see how vital this insurance is.

1. What is income protection?

Income protection is a policy which pays out if you’re unable to work due to ill health. This insurance is to cover income that you receive through employment.

The jargon

Income protection can be a little bit confusing at first glance, because of the jargon that’s used.

• Deferment period – this is the amount of time you must wait before making a claim. For example, if you have a deferment period of 8 weeks, you must be off work for 8 weeks before making a financial claim and receiving payment from the insurer.
• Sum assured – the amount that the policy is expected to pay to you. This will be up to a maximum % of your income.
• Term – the length of your policy. This is often either a set number of years, or many chose to have the policy to retirement age. 
• Claim period – this is the amount of time that a successful claim can pay up to. It’s often 1,2 or 5 years, but ideally you want it all the way to retirement age.
  
  

2. What is income protection used for?

If you have had a successful claim and are in receipt of payment, the money is now yours. Usually, this is used to cover your normal expenses such as rent, bills and food shopping. 

3. Is it worth getting income protection?

All types of protection insurance are invaluable, including income protection. Many people don’t have savings to use if their income was to suddenly stop. When we speak to cashflow specialists and financial planners they often suggest that you have at least 6 months of your income in easily accessible savings at all times. 

Having income protection means that if you were suddenly not able to work, you would still have money coming in to ensure things like bills can be paid for. You then don’t have to worry too much about not being able to afford your regular bills.

With the cost of living crisis you might not want to be forking out money on an insurance that you might not claim on, if you stay well enough to work. But, if for any reason you can’t work due to your health and you don’t have income protection, the ability for you to meet the steep bill increases that we are all facing is going to become much harder.

4. What about employment support allowance?

Employment support allowance is a benefit that you can apply for if you are ill and cannot work, but it doesn’t give you much financial security.

Let’s take a quick step back. If you are unable to work your employer will pay you statutory sick pay for 28 weeks. This is currently £99.35 a week. That’s £2,781.80 to live on for 6 and a half months*.

During the assessment phase for employment support allowance you might be eligible for:

• Up to £61.05 a week if you’re under 25*
• Up to £77 a week if you’re over 25*
  
  

You can be in the assessment phase for 13 weeks or more. After this time you when your application has been assessed you might receive:

• £77 per week in the world-related group*
• £117.60 per week in the support group*
  
  

For many people this will be a significant drop to their household finances and we can help you to insure against this, with income protection.

5. Are income protection payments taxed?

With an individual income protection policy any payments made to you from a successful claim should be tax free.

6. How is income protection calculated?

When applying for income protection, you will come across questions about your job and current income. Insurance companies then use this to decide on the maximum monthly benefit that they can offer you. The benefit amount is usually around 60%-70% of your gross monthly income. 

7. Does income protection cover mental health?

Income protection policies can come with a range of different terms, depending on your circumstances. If you have a hazardous occupation, your policy might come with a certain exclusion. Similarly, if you have an existing health condition such as mental health, it could be that the insurer decides to add an exclusion of mental health onto your policy, meaning you wouldn’t be able to claim for this. 

We have also written a blog on Insurance for freelancers, check it out.

In exchange for a premium, income protection offers you financial security, knowing that your income would be protected if you were unable to work because of your health. If you are unsure on anything or have any specific questions, please do get in touch with one of our advisers.

*Correct as of 5th October, 2022.

References and useful links

Employment and Support Allowance (ESA): What you’ll get – GOV.UK

Statutory Sick Pay (SSP) : Overview – GOV.UK

Related blogs

Why might you need income protection?

Answering the public’s common questions – life insurance edition

Enhanced underwriting – common questions answered