What is income protection, and should you have it? Here, financial expert Michael Barton outlines why income protection is a good idea, and the considerations to make.
Imagine being unable to work because of illness or injury. How long could you survive without your monthly salary? What cutbacks would you need to make if you had to rely on state benefits?
Income protection could be the insurance you need to protect you against life’s unexpected curveballs, helping you exit a period of unexpected health issues with your finances intact instead of in tatters.
There’s even a type of income protection insurance that could pay out if you’re made redundant. It’s the kind of peace-of-mind policy that not only safeguards your lifestyle and financial future, but also gives you the emotional freedom to make better financial decisions.
TLDR: A Quick Summary
If you want to ensure your financial stability, should you be unable to work because of illness or injury (and, in some cases, redundancy), look no further than income protection. This is a type of insurance that offers a continuous (usually tax-free) income stream until you can return to work, or you retire.
You can customise your cover to suit your budget, with key factors influencing policy premiums including age, occupation, and lifestyle.
Understanding how income protection works, potential exclusions, and how to minimise costs and maximise benefits will ensure you invest in the best policy for you.
What Is Income Protection?
Income protection is a special type of insurance policy designed to replace some of your income if you can’t work because of illness or injury.
This should help to provide some financial stability should times get tough, and ensure that your essential expenses are covered. When you do get back on your feet, you shouldn’t have unpaid bills and debts to contend with.
The regular income that this type of insurance provides should help you to focus on recovery rather than suffer the added stress of worrying about how to make ends meet.
How Does Income Protection Work?
Like other types of insurance such as life insurance, you pay a regular monthly premium. In return, if you can’t work because of illness or injury, the policy provides a regular payment while you are recovering.
You set the amount of this payment when you take out the insurance, but typically it is up to 70% of your regular income. You’ll receive income until you can return to work, or the policy term comes to an end.
To make a claim, you must contact your insurance provider as soon as you are unable to work. You’ll need to provide proof of inability to work (medical certificates and other required documentation), and your claim will be assessed.
Once your claim is approved, you’ll receive payments as outlined in the policy. To continue to receive payments, the insurance company may assess your inability to work periodically.
According to the Association of British Insurers, around 85% of all new income protection claims are paid, and the average claim is around £22,000.
Do You Need Income Protection?

While life insurance can provide for your family should you die, income protection provides for you when you’re still living.
Whether you’re an employee, freelancer, or self-employed, if you work and rely on your income to pay your regular bills and living expenses, you probably need income protection.
Income protection will also reduce the need to dip into an emergency fund, too, thus helping to preserve your wealth.
Typically, if you have a mortgage that must be paid each month, have dependents that rely on you, or you lack substantial savings to cover extended periods without income, then income protection is important. It’s even more so if you work in a dangerous or physically demanding job.
In short, if a period without your regular income would jeopardise your financial wellbeing, income protection could be a very good idea.
What Type Of Income Protection Do You Need?
When you start thinking about income protection, you’ll need to consider which type of protection you require. Just as with life insurance, there are many different types of policy to suit unique needs:
Accident and Sickness
These policies are the most basic type of income protection. If you’re ill or injured and unable to work for an extended period, this type of policy will pay you an income.
Accident, Sickness and Unemployment (ASU)
This type also covers you for redundancy in addition to being unable to work if you are ill or injured.
Mortgage Payment Protection Insurance (MPPI)
MPPI is another, more specialised type of income protection, designed specifically to cover your mortgage payments and protect you from having your home repossessed because you’re unable to work.
It’s more comprehensive than any aid you’ll get under the Support for Mortgage Interest (SMI) scheme, and the benefits paid don’t have to be repaid (unlike SMI).
Payment Protection Insurance (PPI)
This one is like MPPI, but designed to cover smaller debts such as credit cards and personal loans.
Income Protection Considerations
In addition to which type of income protection you need, you should also consider a few other key factors associated with income protection insurance. Five key considerations are:
How Much It Costs Vs What It Covers
The more comprehensive your policy (with fewer restrictions and more illnesses and injuries covered), the more expensive the premiums will be, so you’ll need to consider your budget, too.
The Term Duration
For example, a short-term income policy is designed to provide financial support for a temporary setback of usually between one and five years.
Long-term income protection can provide an income through to your retirement or when you can return to work.
The Occupation You Need Covered
This is a more crucial consideration than many might think.
Income protection can provide benefits if you are either unable to do your actual job, or a job for which your skills and experience is suited (called ‘own occupation’ and ‘suited occupation’ respectively).
The Type Of Premium
Returning to cost, most companies that offer income protection will offer two types of premiums – guaranteed and reviewable.
Guaranteed premiums will remain the same throughout the term of the policy, so budgeting is more predictable – though premiums may be higher than for reviewable premium policies in the early years.
A reviewable premium policy is reviewed periodically, and premiums may increase.
Protection Against Inflation
The cheapest policies are those from which the benefits never change. So if you were to make a claim, the income you receive will never increase.
If the payments don’t keep pace with inflation, this could mean financial hardship down the line. Inflation-linked policies provide benefits that increase with inflation – though the premiums you pay will also increase during the term of the policy.
Common Claims & Exclusions
There are many prolonged medical conditions that can be covered by income protection. These include conditions such as cancer and heart disease, as well as certain mental health issues like severe depression.

You can also be covered against injuries resulting from accidents that prevent you from working – spinal injuries and broken legs are common claims.
However, despite a broad range of illnesses and injuries that are covered, there are exclusions that will put the red light on a claim.
If you have a high-risk occupation, you may be excluded completely, while hazardous hobbies may place restrictions on coverage (if you play rugby, for example, a broken leg suffered during a game will lead to a claim being denied).
In addition, you’ll need to let the insurer know of any pre-existing conditions you have. These might exclude you from making a claim for these or other related conditions – and if you make a claim, the insurer will check that you haven’t lied during the application process.
How Much Does Income Protection Cost?
As with many personal insurances, it’s a bit of a challenge to say how much income protection might cost you. Your premiums depend on a range of factors, and can range from as little as £6 or £7 per month to £30 or £40 per month and more.
The key factors that affect the cost of premiums are:
▫️Age: The older you are, the higher your premiums will be.
▫️Occupation: If you work in an office, your premiums are likely to be lower than if you work in a manual job. The more dangerous your job is, the more you’ll need to pay – and some occupations may not be accepted.
▫️Benefit amount: The higher the income you wish to protect, the higher your premiums will be.
▫️Policy term (length of cover): Shorter-dated policies are cheaper.
▫️Lifestyle choices: If you’re a smoker who enjoys scuba diving and mountain climbing every weekend, you’ll be considered a higher risk and will need to pay higher premiums.
Other factors that impact cost include the waiting period before benefits are paid, whether you have comprehensive or limited cover, your gender, medical history, and location.
Debunking Common Misconceptions
When I was a personal financial advisor, I would encounter five common misconceptions about income protection:
“My job isn’t high-risk – I don’t need it.”
Just because your job isn’t high-risk, doesn’t mean you won’t get ill or be injured. If you and/or your family rely on your salary, then income protection has a purpose to serve in your financial armoury.
“I’ve got income protection as part of my employment package.”
Great news if you have, but most benefit packages don’t include this. And where they do, the benefits are often limited – either in value or period of payment.
“State benefits will be enough to see me through.”
Really? State benefits are mostly means tested, so the amount you’ll be able to claim is limited.
Help with mortgage payments is in the form of a loan, so will need to be repaid (with interest). Plus, the welfare system is under attack, with benefits being cut.
Income protection, however, pays out a known amount based on your premiums and income insured – no means testing, and no unexpected cutbacks.
“I’ve got critical illness cover; I don’t need income protection.”
Critical illness insurance and income protection are entirely different. A critical illness policy pays out a lump sum if you are diagnosed with an illness covered by the policy.
Income protection pays you an income until you can return to work.
“With my underlying medical conditions, I won’t be accepted.”
While pre-existing medical conditions may lead to your application for income protection to be denied, it is more likely that the insurer will include certain exclusions within your policy’s terms and conditions.
On top of this, the insurer may include clauses that exclude claims related to your existing medical conditions for a specified period only.
Income Protection FAQs
Here are four of the most frequently asked questions around income protection insurance:
How Much Of My Income Will Be Covered?
Typically, an income protection policy will cover up to 70% of your pre-tax income, though this will depend upon the insurer and specific policy conditions.
How Long Will I Receive Benefits For?
If you make a claim, how long you continue to receive a monthly income depends upon the terms of the policy.
Payouts will begin after the stipulated waiting period, and then can continue from a year through to retirement, depending on whether you have elected for short-term or long-term cover.
When Do Benefits Start?
This depends upon what waiting period you have selected, and can be a few weeks to a few months.
What If I Die Before The End Of The policy?
Many policies include some level of life insurance, helping to protect you should you predecease the policy term. However, you should check this before you start your policy.
Tip
If there is a life insurance element attached, remember to consider this when calculating how much life insurance you need – this could reduce your life insurance premiums.
Are Benefits From Income Protection Taxable?
In most cases, income protection benefits are not taxable. This is because you pay the premiums out of your net income. If your company pays the premiums for you, then your benefits may be taxable.
Tip
Always ask the insurance company to confirm the tax status of benefits. You may need to take advice from a tax expert.
Income Protection – The Bottom Line
If you are working and rely on your income to meet your daily expenses, then you’re likely to need income protection. This type of insurance will replace a portion of your income if you are unable to work because of illness, injury, redundancy, or if your policy is an ASU policy.
Unlike critical illness cover, income protection pays out benefits by way of a regular income stream and not a lump sum payment. Depending on the terms of your policy, the benefits could be paid to you through to your retirement date (or when you can return to work, whichever is the earlier).
Income protection can provide a valuable financial buffer when you need it most, and you can tailor it to your individual circumstances to help protect your financial wellbeing now and in the future.