What is income protection insurance?

Income protection insurance is a financial product that provides regular cash pay-outs should the named policyholder’s primary source of income fail (e.g. sickness, injury). Long-term and short-term insurance plans are available – the policyholder may also choose to delay pay-outs for a number of weeks or months in order to take advantage of lower premiums.

Income protection insurance is tax-free and does not affect the policyholder’s right to any other legal entitlements to sick pay. For further information on income protection insurance, and to discover why you should protect your income, always speak to a reputable insurance broker with an established reputation.

Who should consider income protection insurance?

Unforeseen work-related and health-related issues can lead to cashflow disruption. Income protection insurance, or sickness insurance, is a cashflow safety net that provides workers with a means of meeting regular financial commitments. For example, income protection can help the policyholder to cover household bills and continue to provide for dependents (e.g. children, elderly relatives).

Who is eligible for income protection insurance?

Income protection insurance may be offered to any worker with a regular income. The details of the policy (including weekly/monthly premiums and the amount of cover available) will vary depending on an analysis of several critical factors relating to the policyholder’s circumstances – both in terms of personal circumstances and work-related circumstances.

Factors affecting policy details may include:

• Age/lifestyle of the policyholder
• Any preferred period of deferral*
• Any pre-existing medical conditions
• The type of occupation held by the policyholder
• The desired total amount of income to be covered by the policy

*Employed policyholders may choose a deferral period reflecting the maximum amount of time that sick pay is provided by the employer (e.g. three months). However, where sick pay is not available for any reason (please see below: ‘Is self-employed income protection available?’), the policyholder may choose a minimum deferral period of one day before receiving a pay-out.

Is self-employed income protection available?

Discretionary sick pay and Statutory Sick Pay (SSP) are only available to employed staff members whose employment details meet certain terms (e.g. earning a minimum of £120 per week before tax, unable to work for four consecutive days, etc.). However, self-employed workers are not entitled to the same support. Instead, self-employed income protection is required.

Injury or sickness insurance could provide self-employed workers with between 50%-70% of their income. Also, depending on the policy, the agreement could pay-out over a much longer term in comparison to the capped number of regular pay-outs that employers are legally obliged to make – this means that self-employed income protection provides a logical means of securing income protection even for workers who gain only a portion of their income through self-employment.

How much cover does income protection provide?

Income protection insurance provides policyholders with access to up to 70% of their earnings. The calculation for employed people takes into account the named policyholder’s gross income, whereas the calculation for self-employed workers takes into account the named policyholder’s net profit. Again, if you are unsure, always consult an injury or sickness insurance specialist.