The ins and outs of income protection

Given the current climate, it’s not surprising that income protection is a key concern for many people. Insurers have reported that the number of enquiries about this type of cover rose by more than 1,000% in March as the number of people fearing redundancy skyrocketed. 

Income protection is an insurance policy that pays out if you’re unable to work because of injury or illness. It can include:

• Mortgage cover
• Redundancy protection
• Loan protection
• Accident and sickness cover

Despite it being probably one of the policies most needed, traditionally it’s been one of the least popular products that people take out. According to a survey by Which?, only 9% had income protection compared with 41% with life insurance and 16% with private health insurance. It is, however, recommended for any adult of working age as very few employers will cover your salary for more than a year if you find yourself unable to work.

The cost of income protection is worked out depending on factors such as your health, whether you smoke and how much cover you need. Insurers also take into account the level of risk in your job.

Some insurance providers have started adding coronavirus exemptions or pulling out of the income protection market altogether. However, others have shown quite a bit of flexibility by offering payment holidays for vulnerable cases or offering the option to put policies on hold. They will still offer policies to those on furlough, although they won’t pay out if you are made redundant.

A policy will usually pay out between 50%-70% of your earnings, tax free, although sometimes this is capped. It will pay for as long as the policy lasts or until you can go back to work, whichever is soonest. Most policies don’t pay out until after a waiting period which can be as long as 13 weeks on some of the longer ones.

If you’re thinking of buying income protection to cover the COVID-19 outbreak, it’s unlikely to pay out if you’re only ill for a short while or are self-isolating. Most policies are designed for long-term absences. By the time the waiting period is overhas passed, your period of illness or self isolation  could be over and you could have gone back to work.

You may want to consider index-linking your protection. This means that it will rise with a measure of inflation such as the consumer price index (RPI). Otherwise you could come to make a claim only to find that the level of protection hasn’t kept track with the way your salary might have risen.

A further consideration is ‘stepped benefit’ so that you opt to choose between two different levels of payment depending on the sickness benefits offered by your employer, a lower payment while your employer is still paying you a higher percentage of our salary and a higher amount when your employer reduces their contribution.

There are over 20 different income protection providers so shop around and make sure you’re clear about the conditions under which the policy will pay out.