Income protection insurance can be a lifeline if you can’t work due to injury, illness or disability, but it can be expensive. The average cost of income protection insurance is £25 per month, but there are lots of factors that will impact this cost.

Let’s dive in to find out what income protection insurance covers and what you need to consider before you take it out.

What is income protection insurance?

Income protection insurance is cover that pays you a regular income if you can’t work due to illness, injury or disability. As long as you have always paid your premiums, it will continue to pay you until you return to work, retire or the policy ends.

You’ll usually receive between 50%-65% of your earnings from your normal job before tax. This is because this income is tax-free and your insurance policy will take some money off to account for the state benefits you can claim.

Income protection insurance differs from critical illness insurance, which we cover in another guide.

How much does income protection insurance cost?

The average monthly cost of income protection is £25 per month, but the exact amount you’ll pay varies widely due to several factors:

Your occupation: If your insurer considers you to be working in a job that puts you more at risk of becoming ill or injured, you’ll pay more.

Your age: The older you are, the more likely you are to become unwell, so your premiums will be higher.

How much cover you have: How much you earn and how much of your monthly salary you want covered will affect the price. For example, if you earn £1,500 per month and want to receive payments for 50% of this if you become unwell, you’ll pay less than someone who wants to receive 50% of their monthly salary of £2,500.

Your health: If you have health conditions, you smoke or you’re overweight, you’ll be considered as more of a risk. Therefore, your premiums will be higher.

How long your policy lasts: As you’d expect, the longer your policy lasts, the more it will cost.

How long you wait before you claim: If you can wait longer before you receive income protection payments, for example, because you have a good rate of sick pay from your employer or you have savings, you’ll pay less than someone who needs to claim sooner.

The amount of time each claim is paid for: While many policies will continue to pay you until you return to work or retire, you can choose to receive payments for a set number of months. That will reduce your premiums significantly.

What does income protection insurance cover?

Income protection insurance will cover most illnesses and injuries that may stop you from working in the short or long term, for example:

• A broken leg

• Heart attack or stroke

• Severe anxiety and depression

What does income protection not cover?

Income protection won’t cover you if you’re made redundant, as you will usually receive a payout if you’ve been with the company for over 2 years and you can find another job. Income protection insurance is for when you are physically unable to work rather than for unexpected events such as redundancy or dismissals.

Why have income protection insurance?

There are many reasons why people decide to take out income protection insurance:

• It reassures you that you’ll be able to pay your bills if you get ill and can’t work

• You may not have company sick pay, and statutory sick pay is rarely enough to cover household bills (currently £109.40 per week)

• You don’t want to eat into your savings to support yourself if you can’t work

• You have a family that depends on you financially

How long does income protection insurance last?

You can usually set how long your income protection insurance lasts when you take out the policy. You could decide to have it until your expected retirement age, or you could work with a financial advisor to calculate the age at which you’ll have enough savings and investments to live on if you’re unable to work, or when you draw from your pension.

You can also set how long your income protection insurance payments last if you make a claim. While many policies will continue to pay you until you return to work, some may also offer payments for a limited time – a common limit is 2 years.

When can you claim on income protection insurance?

There’s usually a minimum wait limit on when you can claim on your income protection policy. Again, you can set this based on when your employer’s sick pay and statutory sick pay run out, which can lower your premiums compared with if you set it to kick in sooner. At a minimum, you’ll usually have to wait 4 weeks.

Your policy will also often stipulate a period that you have to return to work for before claiming again for the same condition. Usually, this is around 6 months.

What is the difference between life insurance and income protection?

The main difference between life insurance and income protection is that life insurance pays a lump sum to your family or beneficiaries if you pass away during your policy term. However, income protection insurance pays you monthly payments if you’re unable to work due to illness or injury.

You can have both life insurance and income protection, as they provide cover for different things. Life insurance will only pay out if you die, and sometimes if you are diagnosed with a terminal illness, whereas income protection will pay out after a waiting period whether your illness is terminal or not.

Which is better - critical illness or income protection?

Whether critical illness insurance or income protection is better depends on what you want to use the money for. Critical illness insurance will pay you a lump sum if you fall ill with a specified serious illness – your insurer will tell you which illnesses qualify for a payout when you purchase a policy.

You could use the money from a critical illness policy to pay off the remainder of your mortgage, which is ideal if your serious illness means you might not be able to work for a long time. Another common option is to use the money for private medical treatment if you don’t already have health insurance.

In contrast, income protection insurance doesn’t pay you a lump sum – it’s designed to replace part of your monthly earnings when you’re unable to work for a (usually) shorter period of time. Income protection insurance is more likely to pay out that critical illness cover because you don’t have to have a specified illness to qualify – you just need to be unable to work due to illness or injury.

Do I need income protection for a mortgage?

No, you don’t legally need income protection for a mortgage, but you might want to consider it. Think about how you would keep up with your mortgage repayments if you become unwell and can’t work for a while – do you have savings? Another partner’s income to rely on? If the answer is no, it might be worth taking out income protection insurance to give you peace of mind that you won’t lose your home should you become unwell.

Can the self-employed get income protection insurance?

Yes, the self-employed can get income protection insurance, and they should probably consider it even more than employed people! Unlike the employed, they won’t be eligible for any statutory sick pay, meaning if they can’t work for a while, there is no money coming in.

If you’re self-employed, income protection insurance works in exactly the same way as it does for someone who’s employed, in that it will pay you monthly payments if you’re too unwell to work either for a set term or until you return to work or retire. The only difference is how an insurer will calculate how much to pay you.

If you fall ill and make a claim, most insurers will work out your average monthly income using your pre-tax profits over the course of the past financial year. Your monthly pay-out would be an agreed percentage – usually between 50-65% - of that average monthly income.

How to choose income protection insurance

1. Decide what cover you need

Do an audit of your outgoings so you can figure out how much cover you need. You should be able to choose a percentage of your monthly income up to around two-thirds. Consider how long you can wait without a payment, for example, if you’re covered by a company sick pay policy, or if you’re comfortable with using a certain amount of savings.

2. Be honest about your medical history

You must tell your insurer about any pre-existing medical conditions. If you don’t answer truthfully when you take out the policy, the insurer may not accept any claims you make or your policy could be cancelled.

3. Check the terms and conditions

While you don’t normally need to suffer from a specified illness to get a payout from your income protection insurance, it’s still important to read the small print to understand what’s covered and what’s not. Exclusions can vary between insurers, as can waiting periods, so you must make sure you’ve chosen cover that’s right for you.

4. Compare quotes

Make sure you compare quotes between different insurers to get a view of the market and ensure that you get a good price. We’ve partnered with Unbiased to help you compare quotes for income protection insurance – get quotes now and see how much you could save on your policy.

Disclaimer: This information is intended for editorial purposes only and not intended as a recommendation or financial advice.

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