Income Protection

Do you know how much sick pay you’d get if you were off work ill? Or how long you’d get it for? Would it be enough so you could keep paying your bills?

Some companies don’t pay any sick pay at all. Statutory Sick Pay (SSP) from the Government is a mere £116.75 a week, for a maximum of 28 weeks. (2024/25 tax year.) If you’re self-employed you aren’t even entitled to that.

Income protection is designed to provide a regular monthly income so you can afford to pay your bills until you’re fit enough to return to work.

What does income protection do?

It typically pays out between 55% and 65% of your normal earned income while you are unable to work due to sickness or injury. If you pay the premiums yourself from net pay, any payment you receive back from the policy will be tax-free under current income tax laws. Please note that tax laws can change at any time.

What it won’t do is cover you for:

• unemployment
• furlough
• absence from work for non-sickness/injury-related reasons
• typical pregnancy
• pre-existing medical conditions that you had to declare on the application form – check your offer of terms to make sure what is excluded

Whatever you do, don’t try and hide something – that’s insurance fraud. Be honest and the provider will decide whether to accept it as standard, cover you for it at a higher price, or not cover you for that condition.

Is it worth getting income protection?

It depends on what not having your income due to health issues would mean for you. If it would cause you a lot of financial trouble, then getting this type of insurance could be extremely helpful.

What level of cover do I need?

The level of cover needed is unique to each individual.

It might be useful to work out your living expenses, as this can help determine what level of cover is right for you. List all of your regular outgoings and note whether they would continue or stop if you were off work ill. 

For most people, the biggest regular expense is either a mortgage or rent. This is usually the most obvious and significant cost to consider. You might also have other loans or credit card payments to make.

If you can’t work because of an accident or illness, the costs related to going to work, like transportation, lunch, work clothes, or memberships, might decrease or stop altogether.

But your regular household expenses will probably stay the same, or they might even go up a bit. You’ll still have to pay for things like electricity, gas, water, phone, and internet, not to mention food.

How long do I have to be off work for before it pays out?

That’s known as a deferred period, and you choose that when the policy is set up. The longer the deferred period, the cheaper it will be.

Providers have standard deferred periods they work off, ranging from one day to two years. A good advisor determines when any sick pay from work ends as well as what assets you already have that you might want to rely on. For example, you might have an emergency fund of three months’ net pay in a savings account that you would be happy to use before you’d need a policy like this to start.

You can’t receive full sick pay from work and benefit from this plan at the same time. It’s designed to replace a percentage of lost income, not put you in a better position. There has to be some incentive to go back to work!

If you get partial sick pay then the plan can often be tailored to top that up, then replace it altogether once sick pay ceases. Some providers have special terms for NHS professionals (doctors, dentists, midwives, nurses, and surgeons) and teachers, due to their unique sick pay arrangements.

Does income protection pay out a lump sum?

Income protection pays out a regular monthly amount. It does not pay out a lump sum.

If you would prefer a lump sum if you became ill, you could look at critical illness cover. Bear in mind it only covers certain illnesses and conditions of a specified severity.

How long will income protection pay out for?

Plans can either be short-term or long-term. Short-term plans pay out for a maximum of one, two, or five years, whereas long-term plans can run until age 70, when you might realistically stop working anyway.

In either case, payments will cease when you return to work, if you pass away, or when the policy ends, whichever happens first.

What if my income changes?

Providers will require evidence of earnings if you have to make a claim. They will usually look at income from the last twelve months when calculating what they can pay you, though some will look at it over a longer period to get a better idea of your earnings.

If your income does fluctuate it may mean that the maximum you can receive is less than what you are covered for. It’s important to review your policy regularly to make sure it still meets your needs.

Some policies come with a ‘minimum benefit’ guarantee as a safety net. This provides a minimum benefit, for example £1,500 a month, if you are working a set number of hours at the point of claim but your income is less than it was when the policy started. That way, at least you know you’ll get something from your plan.

What does income protection cost?

That depends on a number of factors, such as:

• Age
• Smoker status and health
• Occupation
• Height and weight
• Medical history
• How much you want to be covered for
• How long you need to be covered for

Providers will charge different amounts based on their attitude to risk. An experienced insurance broker can help you get the right deal for your circumstances.

How can The Mortgage Store Chorley help with income protection?

We understand the peace of mind provided by having the right policies in place. 

We’ll conduct a thorough review of any existing policies you have. If you’re employed, you might also get sick pay through work. Check with your employer to find out what you’re covered for, and for how long. If workplace cover doesn’t provide enough for your needs, a separate policy might be necessary.

Once we can see your current level of cover and understand what your priorities are, we’ll work with you to put an appropriate insurance plan in place.