Income Protection Insurance

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.

IP usually pays out until retirement, death or your return to work, although short-term IP policies are now available at a lower cost. IP doesn’t usually pay out if you’re made redundant, but will often provide ‘back to work’ help if you’re off sick.

Millions of us have policies like private medical insurance or payment protection insurance, sold to us over the years by salespeople who convinced us we needed protecting. However, whilst they were right about the protection, they were often wrong about the policies. The one protection policy every working adult in the UK should consider is the very one most of us don’t have – income protection.

How much does income protection pay out?

Income protection payouts are usually based on a percentage of your earnings: 50% to 70% is the norm. Payments are tax-free.

IP policies only pay out once a pre-agreed period has passed, generally ranging from one to 12 months after you put in a claim. The longer the ‘deferral’ period you choose, the lower your premiums. The default deferral period tends to be 13 or 26 weeks.

Most IP providers report paying high proportions of claims made to them. For 2012, insurance giant Aviva published that it had paid 93.5% of IP claims whilst LV= paid 88.4%. British Friendly and Friends Mutual paid out 97% and 98% respectively.

Why do I need IP?

According to research by Unum and Personnel Today, just 12% of employers support their staff for more than a year if they’re off sick from work. Given the low level of state benefits available, everyone of working age should consider IP, but when asked, just 9% said they have some form of IP, compared with 41% who have life insurance and 16% who have private medical insurance (PMI).

One industry survey showed less than a quarter of people deemed protecting their income to be essential, compared with 74% who said the same of needing access to broadband internet.

Is income protection the same as PPI?

No – income protection isn’t the same as the widely mis-sold payment protection insurance (PPI). Where PPI covers a particular debt, income protection (IP) hands you a tax-free percentage of your income if you’re unable to work due to illness or injury. How you spend the money is up to you.

Different types of income protection policy

There are three types of policy you can buy to protect your income if you’re unable to work due to illness or accident.

Long-term income protection: This type of IP policy pays out until a fixed age, death or your return to work. It’s underwritten at the point of applying for the policy, rather than when you put in a claim. This means you’ll know exactly what you’re covered for from day one, as well as any pre-existing conditions you’re not insured for.

Short-term income protection: Like long term income protection, this type of policy is fully underwritten when you take out the cover. However, rather than pay out until death or retirement, short term income protection, has a fixed maximum payout period of between one and five years.

Accident, sickness and unemployment (ASU) cover: ASU providers may screen potential customers, but do not conduct full medical underwriting at outset. Cover tends to be cheaper than IP, but you have less certainty that you’ll be covered when you come to put in a claim. As the name suggests, ASU policies cover you for unemployment.

Your employer may also provide a version of one of these forms of cover as part of a group scheme. You should check whether this is available – as it is often cheaper to buy cover this way than direct from an insurer.

There are other providers of Payment Protection Insurance [Short-Term Income Protection] and other products designed to protect you against loss of income. For impartial information about insurance, please visit the website at www.moneyadviceservice.org.uk