Is Income Protection Insurance Worth It?

By Camellia White | Last reviewed

Life is full of uncertainties, and unforeseen circumstances such as illness or injury can disrupt your ability to work, impacting your financial stability. Income Protection (IP) Insurance offers a safeguard, providing a regular income if you're unable to work due to health issues. But is it the right choice for you? Let's explore the benefits, considerations, and factors to help you make an informed decision.

What Is Income Protection Insurance?

Income Protection Insurance is designed to replace a portion of your income if you're unable to work due to illness or injury. Unlike critical illness cover, which pays a lump sum for specific conditions, IP provides ongoing payments, typically covering between 50% and 65% of your pre-tax earnings*, until you can return to work or reach retirement age, depending on your policy.

Why Consider Income Protection Insurance?

- Financial Stability During Recovery: if you become unable to work, IP ensures you continue to receive a regular income, helping you manage essential expenses such as mortgage payments, utility bills, and daily living costs. This support allows you to focus on recovery without the added stress of financial strain.

- Comprehensive Coverage: IP covers a wide range of illnesses and injuries that prevent you from working, including stress-related and mental health conditions. This broad coverage provides peace of mind, knowing you're protected against various health challenges.

- Flexibility: policies can be tailored to suit your needs, allowing you to choose the benefit amount, waiting period before payments commence, and the duration of coverage. This customisation ensures the policy aligns with your personal circumstances and financial commitments.

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Key Considerations Before Purchasing Income Protection

Before deciding on Income Protection Insurance, assess the following:

- Existing Employer Benefits: some employers offer sick pay schemes or group income protection as part of their benefits package. Review your employment contract or consult your HR department to understand what support is available to you.

- State Benefits: evaluate the state benefits you may be entitled to in the event of illness or injury. Keep in mind that these may be limited and might not fully cover your financial needs during an extended period off work.

- Personal Savings: consider whether you have sufficient savings to cover your expenses if you're unable to work. While savings can provide a temporary buffer, they may not be sustainable for long-term income replacement.

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Factors Affecting Policy Cost

The cost of an IP policy varies based on several factors:

- Age: generally, the younger you are when you take out a policy, the lower the premiums, as the risk of health issues increases with age.

- Health and Lifestyle: pre-existing medical conditions, smoking status, and participation in high-risk activities can influence premium costs. Maintaining a healthy lifestyle may help reduce your premiums.

- Occupation: jobs with higher risk factors may attract higher premiums due to the increased likelihood of injury or illness.

- Deferred Period: this is the waiting time between becoming unable to work and when you start receiving payments. Choosing a longer deferred period can reduce premium costs but requires you to have alternative financial support during that time.

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Mortgage or rent

Household bills

Debt or loan payments

Travel costs

Food

Family expenses

Options For Covering Pre-Existing Conditions

While standard PMI policies often exclude pre-existing conditions, some insurers offer options to include certain conditions for an additional premium. For instance, some insurers may provide coverage for specific pre-existing conditions, such as asthma, diabetes, and arthritis, subject to annual limits and continuous coverage requirements.

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Is Income Protection Insurance Right for You?

Determining whether IP is suitable depends on your individual circumstances:

- Dependents: if you have family members who rely on your income, IP can provide essential financial support in your absence.

- Self-Employed Status: without access to employer sick pay, self-employed individuals may find IP particularly beneficial to ensure a continued income stream during periods of ill health.

- Limited Savings: if your savings wouldn't comfortably cover an extended period without income, IP offers a safety net to protect your financial well-being.

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Summary

Income Protection Insurance serves as a valuable tool to safeguard against the financial impact of being unable to work due to illness or injury. By providing a regular income during challenging times, it enables you to focus on recovery without the added worry of meeting financial obligations. Assess your personal situation, existing benefits, and financial resilience to determine if IP aligns with your needs.

If you’d like to speak to an FCA authorised advisor, just take a few moments to complete our form and one of our partners will contact you right away to discuss your current situation and insurance needs, for free and without obligation.

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