Individual income protection
What is income protection insurance?
Formerly known as permanent health insurance (PHI), long-term income protection (IP) is an insurance policy that pays out if you’re unable to work due to injury or illness.
Income protection is probably the one policy that every working adult in the UK should consider and is the very one most of us don’t have – income protection. Whilst most of us have life insurance and possibly critical illness cover it’s estimated that only one in ten people have income protection.
Our ability to earn income is possibly our most valuable asset and an inability to earn a living due to ill health or accident could be financially devastating.
Although there are some lower cost and short-term IP policies which pay out for just a couple of years most IP usually pays out until retirement age, death or until we are well enough to return to work. IP doesn’t usually pay out if you’re made redundant, but will often provide ‘back to work’ help if you’re off sick.
How much does income protection pay out?
Income protection benefits are usually based on a percentage of your earnings: 50% to 70% is typical. Payments are tax-free under current tax legislation (April 2016).
IP policies only pay out after a “deferment period” which is pre-agreed when you take out the policy, these periods are generally from one to 12 months. The longer the ‘deferral’ period you choose, the lower your premiums will be however you’ll need to carefully consider your ability to survive without an income.
What support will the state or my employer give me if I’m unable to work?
No matter how generous your employer may be there will be some limit in your employment contract with regards to sick pay. You need to qualify for Statutory Sick Pay (SSP) which is £88.45 per week (April 2016) but the majority of people will struggle to survive on this level of income.