Quick Answer: What Is Income Protection Insurance?
If illness or injury stopped you working, how long could you continue paying your mortgage and other household bills without your usual earnings?
Income protection insurance is designed to provide a regular income if you are unable to work because of illness or injury and meet the policy’s definition of incapacity. Payments usually begin after an agreed deferred period and replace part of your earnings rather than your full salary. The amount paid, how long payments continue and what you can claim for will depend on the policy.
For mortgage holders, income protection can provide a financial buffer that may help towards mortgage payments and other essential costs while you are unable to earn.
How Does Income Protection Insurance Work?
When taking out income protection insurance, you choose a level of cover based on your earnings and needs, subject to the insurer’s limits and underwriting. You pay a regular premium to keep the policy in place.
If illness or injury later leaves you unable to work, you can make a claim. The insurer will assess it against the terms of your policy, including its definition of incapacity and any relevant exclusions.
A successful claim does not normally result in an immediate payment. Income protection policies have a deferred period, sometimes called a waiting period, which is the agreed length of time you need to be unable to work before benefit payments begin.
Someone receiving several months of full sick pay from their employer might choose cover that starts after their sick pay reduces or ends. A person with little or no sick pay may have different needs. The deferred period can also affect the premium, with longer periods generally costing less.
Once an eligible claim reaches the end of the deferred period, the policy can provide regular payments. Depending on the type of cover, payments may continue for a defined benefit period or potentially until you are able to return to work, retire or reach the end of the policy term.
The exact conditions differ between policies, which makes the wording important when comparing cover.
What Does Income Protection Cover?
Income protection is generally concerned with how illness or injury affects your ability to work rather than simply whether you have received a particular diagnosis.
Physical illnesses and injuries can potentially result in a claim if they meet the policy terms. Mental health and musculoskeletal conditions may also be covered by some policies, depending on the insurer, underwriting and circumstances of the claim.
A diagnosis by itself does not necessarily mean a claim will be paid. The insurer will consider whether your condition meets the definition of incapacity set out in the policy.
Exclusions can also apply. An insurer may exclude particular medical conditions or apply different terms following underwriting. Your health, medical history, occupation and lifestyle can all form part of the application.
Providing accurate information during an insurance application is important. You should answer the insurer’s questions fully and accurately rather than leaving out information because you are concerned it could affect the premium or terms offered.
Income protection also should not be assumed to cover redundancy. Long-term income protection is primarily designed around being unable to work because of illness or injury. Separate products may provide unemployment cover, so the policy wording should always be checked if redundancy is a concern.
How Much Does Income Protection Pay?
Income protection normally replaces part of your earnings rather than your entire salary.
The amount you can insure depends on the policy and insurer. Other income received while making a claim may also affect the amount payable, depending on the policy terms.
Three different periods are particularly important when comparing cover.
- The deferred period is how long you must wait after becoming unable to work before eligible payments begin.
- The benefit period is how long an eligible claim can continue to pay. Some policies limit individual claims to a particular period, while longer-term policies can potentially continue paying for much longer, subject to their terms.
- The policy term is how long the insurance itself remains in place.
Keeping these separate makes it easier to understand what you are buying. A policy lasting many years does not necessarily mean every claim can be paid for the full policy term.
You should also check how the benefit is treated over time. Some policies may offer increasing benefits or other options designed to account for rising living costs, while others may provide a level benefit.
What Does ‘Unable to Work’ Mean For Income Protection?
The definition of incapacity is one of the most important parts of an income protection policy. Similar labels can also be defined differently between insurers, so the actual policy wording needs to be checked.
| Definition | What It Broadly Means |
|---|---|
| Own Occupation | A claim is assessed against whether illness or injury prevents you from carrying out your own occupation, according to the policy definition. |
| Suited Occupation | The assessment can consider whether you are able to perform another occupation considered suitable based on factors set out by the insurer. |
| Any Occupation Or Activities-Based | Cover may use a broader test of your ability to work or your ability to complete specified activities, depending on the policy wording. |
These differences can affect when a policy pays.
For example, being unable to continue in your existing role does not necessarily satisfy a policy that assesses whether you could undertake other work. This is why the incapacity definition deserves as much attention as the monthly premium or benefit amount.
Income Protection For Self-Employed People
Income protection can be particularly relevant to consider when you work for yourself because you do not have an employer providing occupational sick pay.
A sole trader who cannot work because of illness could see their earnings fall quickly. Contractors and company directors can face different circumstances depending on how they work and receive income.
Income protection for self-employed applicants therefore needs to reflect how earnings are structured. Insurers may require evidence of income when cover is arranged or when a claim is made, subject to their requirements. Fluctuating earnings can make this more important.
Personal income protection should not be assumed to cover business expenses or replace every form of income received through a business. The way cover works for sole traders, contractors and company directors can differ, so the policy needs to match the person’s actual circumstances.
If you are considering both protection and a mortgage, our guide to getting a mortgage when self-employed also explains how lenders can assess self-employed income when you apply for borrowing.
How Can Income Protection Help With A Mortgage?
Income protection insurance does not usually pay off your mortgage or send your regular mortgage payment directly to the lender.
Instead, an eligible claim provides income to you. That money can then help towards the costs you continue to have while you are unable to work, which may include your mortgage.
This distinction matters because a household usually has much more to pay for than the mortgage alone. Council tax, utilities, food, existing credit commitments and other regular expenses can continue even when earnings have fallen.
When considering mortgage income protection, it can help to work out the size of the financial gap you would face if you could not work.
Look at:
- Your normal mortgage payment and essential household spending
- How much sick pay you would receive and for how long
- Savings you could realistically use
- Other household income, including a partner’s earnings
- Existing insurance or workplace protection
- Debts and other regular commitments
The answer will be different for every household. Someone with substantial savings and long-term employer sick pay may have a different need from a household relying heavily on one income.
Review Your Mortgage And Protection Needs
Income protection can be considered alongside your wider mortgage advice, particularly when reviewing how affordable your commitments would remain if your circumstances changed.
Is Income Protection The Same As Other Mortgage Protection Insurance?
Income protection is one form of protection that can be considered alongside a mortgage, but it works differently from life insurance, critical illness cover and mortgage payment protection insurance.
| Type Of Cover | How It Generally Pays | Broad Purpose |
|---|---|---|
| Income Protection | Regular payments following an eligible claim | Replaces part of earnings when illness or injury prevents you from working |
| Critical Illness Cover | Usually a lump sum following a valid claim | Provides money following diagnosis of a specified condition that meets the policy definition |
| Life Insurance | Usually a lump sum following a valid claim on death during the policy term | Provides financial support for beneficiaries, which could be used towards a mortgage and other needs |
| Mortgage Payment Protection Insurance (MPPI) | Usually regular payments for a limited period following an eligible claim | Can help with mortgage payments following circumstances covered by the policy, which may include accident, sickness or unemployment depending on the cover |
The right type and level of protection depends on what financial risk you are trying to cover. Some people may hold more than one type because they address different circumstances.
Our guide to mortgage protection insurance looks more broadly at the different forms of cover that can be considered alongside a mortgage.
How Much Does Income Protection Insurance Cost?
There is no single price for income protection insurance.
Premiums can be influenced by factors such as your age, health, occupation and lifestyle. The amount of income you want to insure, your chosen deferred period, the length of cover and the way incapacity is defined can also affect the cost.
Your medical history may affect the terms an insurer is prepared to offer. Depending on the circumstances, this could affect the premium, result in an exclusion or influence whether cover is available.
Premium structures can differ too. Some policies have guaranteed premiums that are designed to remain fixed unless changes are made to the cover, while other premiums may be reviewable or increase according to the terms of the policy. Options such as index-linked cover can also affect how benefits and premiums change over time.
Price is therefore only one part of comparing policies. A cheaper policy may have a longer deferred period, a different incapacity definition or different exclusions from another option.
Is Income Protection Insurance Worth It?
There is no universal answer because income protection will not be suitable or necessary for everyone.
A useful starting point is to consider what would happen financially if your earnings stopped for several months or longer.
Employer sick pay can reduce the amount of cover an employee needs, while savings could provide another financial buffer. Existing workplace benefits and other insurance should also be checked before arranging additional protection.
People who are self-employed, have limited sick pay or rely heavily on their earnings to meet household commitments may have a larger income gap to consider. That still does not mean a particular policy is automatically suitable.
Your mortgage, other monthly commitments, savings, household income and budget for insurance all need to be considered together.
How Can An Adviser Help With Income Protection?
An adviser can help you work out how much of an income gap you would actually face if illness or injury prevented you from working.
This can include reviewing your employer sick pay, savings, existing protection and regular household commitments before deciding whether additional cover is appropriate.
When comparing policies, an adviser can also explain differences in deferred periods, benefit periods and incapacity definitions, alongside the exclusions and other policy terms that may affect a claim.
For mortgage holders, reviewing protection alongside the mortgage can provide a clearer picture of how the household would manage its commitments if earnings changed.
Speak To An Adviser About Income Protection
If you are reviewing your mortgage or want to understand how your household finances could be affected if you were unable to work, at Key Mortgage Advice, we can discuss your protection needs alongside your wider mortgage arrangements.
A protection review can look at the cover you already have, the income you rely on and the commitments you would still need to meet before considering the available options.
You can call us on 01772 620000 to discuss your circumstances or book an appointment with an adviser.
The information in this article is for general guidance and does not constitute personal advice. Policy definitions, exclusions and eligibility vary. Always check the policy documentation and seek advice based on your circumstances.
Income Protection Insurance FAQs
Is income protection the same as mortgage protection insurance?
Income protection is a specific type of cover that can provide regular payments if illness or injury leaves you unable to work and you meet the policy terms. Mortgage protection is a broader term that can refer to different forms of insurance associated with protecting mortgage payments or the household’s ability to deal with the mortgage.
Does income protection cover redundancy?
Standard long-term income protection is generally designed to cover loss of earnings caused by illness or injury rather than redundancy. Some separate insurance products may include unemployment cover, so check exactly what events a policy covers before buying it.
Can I get income protection if I am self-employed?
Self-employed people can apply for income protection. The insurer will consider factors including your health, occupation and earnings when assessing the application. How income is evidenced and how much can be covered will depend on the insurer and policy.
Does income protection pay the mortgage directly?
Income protection does not usually pay your mortgage lender directly. Following an eligible claim, it normally provides regular payments to you, which can help towards the mortgage and other living costs.
Can I have income protection and critical illness cover?
It is possible to have both because they provide different forms of protection. Income protection can provide regular payments following an eligible incapacity claim, while critical illness cover normally pays a lump sum if you are diagnosed with a specified condition and meet the policy definition.
How soon does income protection pay out?
Payments do not normally start immediately. They begin after the deferred or waiting period specified in the policy, provided the claim is accepted and the policy conditions are met. Deferred periods vary, so this should be checked when choosing cover.
Will income protection replace my full salary?
Income protection normally covers only part of your earnings rather than replacing your full salary. The amount available depends on the insurer, policy terms, your earnings and potentially other income received during a claim.
