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Income protection insurance

Income protection insurance could offer a safety net if you need to take time off work. We look at whether it's worth it for a group of employees and self-employed individuals
Dean SobersSenior researcher & writer
Income protection explained

What is income protection insurance?

Income protection insurance is a policy that pays out if you're unable to work because of injury or illness. It works by paying out regularly to replace a portion of your income.

Formerly known as permanent health insurance, it's there to help you pay your household bills, mortgage payments, credit card bills and everyday costs that you can no longer cover, by making sure you have a regular income over the long term.

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How does income protection work?

Income protection usually pays out until retirement, death or your return to work, although short-term income protection policies, which last for one or two years, are also available at a lower cost. 

It's not the same thing as critical illness insurance, which pays out a single lump sum in the event of a serious illness, or mortgage payment protection insurance, which specifically ensures your mortgage payments will be met.

Depending on the policy, it can provide between 50-70% of your income. There can be a gap - the 'deferral period' - before you receive the first payment, depending on the policy and premiums.

Is it worth getting income protection insurance?

It depends on your circumstances, but income protection insurance could offer protection if you fall ill.

Unfortunately, only a few employers support their staff for long periods if they're off sick from work. Some employers can provide as much as a year on full pay; other employers will provide six months on full pay and then a period on half pay before reducing sick pay to the statutory minimum

Many employers provide significantly less time off on full pay - your employment contract will tell you where you stand.

If you are approaching retirement, have substantial savings or have an employment contract that gives you sufficient sick pay then income protection insurance may not be worth taking out. 

For many people, given the low level of state benefits available, and the lack of statutory sick pay for anyone who is self-employed, those of working age should consider some form of income protection if they can afford it. 

Neither income protection nor short-term income protection pay out if you're made redundant. But they will often provide 'back to work' help if you're off sick. Note that income protection insurance is different from life insurance, which pays out if you die.


Find out how does life insurance work?


How much does income protection insurance cost?

Your age, your health, whether you smoke and the percentage of income you'd like to cover will all affect your premium, but your type of job also plays a major part in determining what you'll pay.

Many insurers group jobs into four categories of risk, though some have more. For example, jobs may be divided into the following groups:

  • Class 1: Professional; managers; administrative staff; staff with limited business mileage; admin clerk; computer programmer; secretary.
  • Class 2: Some workers with high business mileage; skilled manual worker; engineer; florist; shop assistant.
  • Class 3: Skilled manual workers and some semi-skilled workers; care worker; plumber; teacher.
  • Class 4: Heavy manual workers and some unskilled workers; bar person; construction worker; mechanic.

The riskier your job is deemed, the more likely it is that you may need to make a claim. Therefore, those in the riskiest occupations tend to pay higher premiums. 

Other factors include whether you are paying a standard or a guaranteed premium. A standard income protection policy means the insurer can increase it over time, while a guaranteed premium stays fixed for the duration of the policy.

Income protection insurance quotes compared

Using data from life insurance experts LifeSearch, we've looked at the average monthly cost for different roles. 

This data was taken in March 2024 and is only an example. Individual quotes will vary depending on your personal circumstances. You may wish to speak to an independent advisor for tailored advice.

35-year-old person in an administrative role (non-smoker) with a £1,500 monthly benefit, a three-month deferred period, and coverage until age 65:

  • 12 months payout: £8.94
  • 24 months payout: £11.03
  • Until end of policy: £23.66

35-year-old builder (non-smoker) with a £1,500 monthly benefit, a three-month deferred period, and coverage until age 65:

  • 12 months payout: £15.32
  • 24 months payout: £17.81
  • Until end of policy: £42.49

35-year-old builder (non-smoker) with a £1,500 monthly benefit, a one-month deferred period, and coverage until age 65:

  • 12 months payout: £29.76
  • 24 months payout: £31.84
  • Until end of policy: £81.40

Find out more and get advice on income protection using the service provided by LifeSearch. Discover more.

What else does income protection cover?

Income protection policies will come with a whole range of benefits. Not all insurers will offer all of these features, but these are some you may encounter.

  • Payouts for hospitalisation: some policies pay you a proportion of your income protection if you go into hospital, even if this is before your deferral period is over.
  • Waiver of premiums: this means you won't have to pay premiums while you are claiming on your income protection policy.
  • Life insurance: most income protection policies come with life insurance, usually equivalent to a year or two years' worth of monthly premiums.
  • Payments on return to work: many income protection policies don't stop paying when you go back to work. If your earnings are reduced because of your illness (perhaps because you are working fewer days), your income protection will continue paying out, albeit at a reduced rate in line with your reduced earnings. This will end once your earnings recover to the level when you took the policy out.
  • No deferral if you get ill again: if you've made a claim once and you get ill or incapacitated again within 12 months, many insurers will waive the deferral period, meaning you don't have to wait to get a payout.

When and how does income protection pay out?

How much you’ll receive

Income protection payouts are usually based on a percentage of your earnings: 50% to 70% is the norm. Sometimes, an insurer might pay out a higher percentage of one portion of your salary (perhaps the first £50,000), and a lower percentage on anything above that.

  • Say you earn £40,000 a year, and you take out an income protection policy designed to pay out 60% of your salary. 
  • Over the course of a year your policy will pay out £40,000 x 60% = £24,000 to replace your annual income. 

The good news is that payments from income protection policies are tax free.  

How long it pays out for

Income protection insurance will pay out for as long as you remain ill and unable to work, until you die or until the policy term comes to an end, whichever is sooner. If you make a good recovery, income replacement insurance will often provide help in returning to work too.

Find out more and get advice on income protection using the service provided by LifeSearch. Discover more.

When you’ll receive it

Income protection policies pay out only once a pre-agreed period has passed, generally ranging from one to 12 months after you were taken ill. The longer the 'deferral' period you choose, the lower your premiums. The default deferral period tends to be 13 or 26 weeks, but it can be as low as four weeks.

How an income protection insurer defines your inability to work will also influence if, and when, your income protection policy pays out.

How to claim on your income protection policy

You will have to meet exactly the criteria laid down by the policy and specifically the definition of the occupation covered and your ability to do alternative work, if that applies. 

There are three methods insurers use: activities of daily living, suited occupation and own occupation.

1. Own occupation 

These policies pay out if you can't do the job you currently hold at the point of making a claim. An insurer will not make an assessment that you could take a different, similar job, and therefore refuse to pay, like a 'suited occupation' policy (see below). 

This type of income protection provides the highest level of protection should you get ill and are unable to do your job, but it is also the most expensive.

2. Suited occupation

If an income protection policy is bought on a 'suited' basis, this means that your insurer accepts you can't do your job anymore, but may not pay out when you make a claim if it believes you are able to do some similar work. For example, you may have a senior role managing a team of people, which you can no longer do because of stress.

With a suited policy, the insurer might deem that you go down a level, where you're doing a similar role but no longer managing a team, and therefore refuse to pay out. 

A suited policy is better than one that uses activities of daily living to assess your ability to work (see below), but the type that offers the best protection is the own occupation policy.

3. Activities of daily living

Some older income protection policies use a method called 'activities of daily living' - otherwise known as 'work tasks'.

These tasks are generally very basic - for example showering, getting dressed, using the toilet, brushing your teeth, or walking, climbing stairs and getting in and out of a car. If you were unable to do, for example, three of these things, the policy will pay out.

These types of policies tend to be cheaper but aren't recommended. You might be so ill that you cannot work, but can still walk, lift and write, and an insurer may turn down your claim, arguing that you could do some type of job.

Can you get income protection if you’re self-employed?

Yes, self-employed individuals can get income protection insurance.

It could be particularly important for self-employed workers because they don't have the same benefits as employees, such as sick leave, retirement contributions or disability benefits provided by an employer.

Self-employed individuals may add income protection to their business plan. This type of coverage typically pays out based on your share of your business's profits before taxes. If you're operating through a limited company, some insurers may also count dividends as income, as long as they're directly related to your work and come from current profits after tax.

What is group income protection?

Group income protection is a type of insurance offered by employers to their employees, designed to give financial support in the event of illness or injury that makes an employee unable to work. Unlike individual insurance policies which are purchased independently, group income protection covers a group of employees under a single plan.

Typically, the employer is responsible for covering the cost of premiums for this insurance, although in some cases employees may also contribute to the premiums. The coverage extends to all employees included in the group plan, offering them a safety net in times of need.

If an employee covered by the group income protection plan is unable to work due to a covered condition, the insurance provides them with a regular income replacement, usually a percentage of their salary. This financial support continues until the employee can return to work or reaches a specified retirement age.

What is accident, sickness and unemployment insurance?

Accident, sickness and unemployment policies (ASU) are a cheaper alternative, named because – depending on your choice – you can buy policies to cover you in the event of accident, sickness or unemployment.

Like short-term income protection policies, they'll typically provide cover for around one to two years.

The main difference with ASU policies is they're sold without full medical underwriting, which means you have less certainty that you'll be covered when you put in a claim.

Income protection FAQs

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