Income Protection Insurance - What Is It and Do I Need It?

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In the current climate, it’s fair to say that we are all so grateful for our income. The last year or so has been really tough on so many people financially, and we’ve all realised the importance of a roof over our heads and food in the cupboards.

With that in mind, why are so many of us unprotected when it comes to life insurance? And particularly income protection insurance? It makes total sense to insure your income, so that if you are unable to work due to injury or illness, you can continue to keep the bills paid and the family warm and fed.

About income protection insurance

Income protection insurance sits under the umbrella of life insurance. When you take out an income protection policy, you pay monthly to your provider to allow you to claim if you were to become too ill or injured to go to work for a prolonged period of time. Claiming on an income protection policy provides you with a percentage of your salary (usually between 50-70%) and enables you to continue meeting your financial responsibilities.

Income protection insurance is different to your standard life insurance policy as it is designed to pay out whilst you’re still around, rather than upon death. It also differs in that it pays out in regular, manageable chunks as opposed to one large lump sum.

When you take out an income protection policy, you will need to decide on a few things. Firstly, the amount of cover you have. You could either stretch yourself to cover as much of your income as possible, or organise enough to cover your mortgage/rent repayments. The more cover you take out, the more you’ll pay in monthly premiums. The cost of your premiums will also depend on your lifestyle, your age, your job, hobbies, current health and medical history.

You’ll also need to decide on something called a ‘deferral period’. This is the period of time between making a claim and beginning to receive your repayments and could be six months or a year - sometimes even longer. The longer your deferral period is, the cheaper your premiums will be. During the deferral period, you’ll want to make sure you have some money to fall back on before your payouts kick in.

Once your payouts begin, they will continue until you recover and go back to work, reach state pension age and retire, or pass away during the period of the claim. In these instances, your policy will automatically end.

I’m self-employed - what now?

You don’t need to have a fixed income from an employer to be eligible for income protection insurance. The self-employed can absolutely get income protection insurance and actually, it’s probably more valuable for the self-employed than anyone else. When you are self-employed, it’s all on you. No sick pay, no maternity pay. Protecting your income is all the more important.

You could pin your hopes on qualifying for Employment and Support Allowance, which is financial support from the government if you are unable to work due to illness or disability. You’ll be provided with much more money however, if you have an income protection policy to claim on. If you can, factor income protection insurance in as part of your business plan.

When calculating your monthly income, a provider will base it on your share of the pre-tax profits generated by your business. Most income protection providers know exactly how to get the right cover in place for a self-employed applicant, so there’s no need to worry about the process.

We should all consider protecting our income - especially if you have a family. You have little people who depend on you and your income to keep their world turning as normal. If that’s not reason enough to get yourself covered with income protection insurance, then I’m not sure what is!

Have you got income protection insurance?