What is income protection insurance?

Income protection insurance covers most illnesses and injuries that stop you working either in the short or long term, but it doesn't pay out if you're made redundant. Here's how a policy usually works:

• It replaces part of your income if you suffer a loss of earnings due to becoming ill or injured and you're unable to work.
• It covers you until you recover, retire or die – or until your policy (or its limited claim period) ends.
• You can claim as many times as you need to, while the policy lasts and use the money to help pay essentials like the mortgage and utilities until you're back on your feet.

It's worth noting, it's not a savings or investment product and will only pay out on a successful claim.

Your premiums are determined by your policy and individual circumstances. Factors that affect the amount you pay are:

• your job
• you age
• how much of your income is covered
• your health
• when you want your policy to end
• how long you want to wait before payments are made to you
• the amount of time each claim will be paid for.

Payments usually start after any sick pay ends or other insurance stops covering you. The longer you choose to wait for payments to be made, the lower your policy premium can be.

Income protection pays out a percentage of your earnings before tax, usually between 50% and 70%, and all payments are free of income tax. 

You can sometimes get a policy that pays out a higher percentage of one portion of your salary, and less on anything above that. For example, a policy might pay 65% of the first £60,000 of earnings, and 45% of any earnings above £60,000.

There may be a maximum amount it will pay out each year.

Here are some things to consider before taking out a policy:

• What would happen if you got ill and couldn’t work? Could you afford to pay your mortgage and other bills?
• If you’re employed, do you have sick pay to fall back on – and how long is this paid for? This may only be Statutory Sick Pay which is just £123.25 per week.
• If you’re self-employed, what would you do if you couldn’t work because of illness or injury?
• Can you afford the level of cover you’ll need? You need to set premiums you can afford, but also make sure the policy will cover your bills if you do make a claim.

Income protection isn't right for everyone. That could include you in these circumstances:

• Your sick pay could cover you. Check how long your sick pay will last as some employers pay this for more than 12 months.
• You could survive on government benefits. Government benefits can change at any time. Please refer to gov.uk for further information.
• Your savings can support you. Remember that your savings might need to see you through a long period.
• Your partner or family could support you. Bear in mind you may need their financial support for a long time.

These are two very different types of cover. 

Income protection insurance pays a percentage of your gross salary as a regular payment until you can return to work.

Critical illness cover provides some financial help, usually a lump sum payment, if you're diagnosed with a critical illness that’s covered in your policy. These policies are not savings or investment products and will only pay out on a successful claim.

No, these are two different things. While income protection pays you a percentage of your salary if you’re unable to work due to illness or injury, Payment Protection Insurance (PPI) covers the repayments on a specific debt, such as a mortgage, loan or credit card.

Any money you receive from an income protection policy may affect your eligibility for means-tested government benefits. Please bear in mind that government benefits can change at any time.