Income Protection

I want to replace my income if I become unable to work due to ill health or sickness.

Being unable to work can quickly turn our world upside down. No one likes to think that something bad will happen to them, but if you couldn’t work due to a serious illness, how would you manage financially? Could you survive on savings or sick pay from work? If not, you may need some other way to keep paying the bills – and you might want to consider income protection insurance. Income Protection Insurance covers most illnesses and injuries that stop you working either in the short or long term – however, it doesn’t pay out if you’re made redundant. You might think this will not happen to you and of course we hope it doesn't, but it's important to recognize that no one is immune to the risk of illness and accidents.

Unfortunate accident

No one can guarantee that they will not be the victim of an unfortunate accident or be diagnosed with a serious illness. The bills won’t stop arriving nor the mortgage payments stop being deducted from your bank account, so going without income protection insurance could be tempting fate. It provides a monthly payment if you can’t work because you’re ill or injured, and typically pays out until you can start working again, or until you retire, die or the end of the policy term – whichever is sooner.

Struggle financially

Some people receive generous sickness benefits through their workplace, and these can extend right up until the date upon which they had intended to retire. However, some employees with long term health problems could, on the other hand, find themselves having to rely on the state, which is likely to prove hard.

Without a regular income, you may find it a struggle financially, even if you were ill for only a short period, and you could end up using your savings to pay the bills. In an event that you suffered from a serious illness, medical condition, or accident, you could even find that you are never able to return to work.

After-tax earnings

Income protection insurance aims to put you back to the position you were in before you were unable to work. It does not allow you to make a profit out of your misfortune. So, the maximum amount of income you can replace through insurance is broadly the after-tax earnings you have lost, less an adjustment for state benefits you can claim.

This is typically translated into a percentage of your salary before tax, but the actual amount will depend on the company that provides your cover.

Individual policies

If you are self-employed, then no work is also likely to mean no income. However, depending on what you do, you may have income coming in from earlier work, even if you are ill for several months. The self-employed can take out individual policies rather than business ones, but you need to ascertain on what basis the insurer will pay out. A typical basis for payment is your pre-tax share of the gross profit, after deduction of trading expenses, in the 12 months immediately prior to the date of your incapacity. Some policies operate an average over the last three years, as they understand that self-employed people often have a fluctuating income.