Having income protection benefits your whole family by safeguarding up to 65% of your salary, so you can maintain your lifestyle and pay the mortgage if you suddenly become unemployed or can’t work.

When it comes to finding a policy, there’s lots on offer which can make it tricky to choose a plan – to make things clearer and help you make a more informed decision, here’s income insurance explained.

What is income protection insurance?

Income protection policies provide you with a monthly, tax-free income if you find yourself out of work – it’s also sometimes known as disability income protection insurance.

Broadly speaking, income protection services can be divided into short-term plans which cover you for a limited amount of time (often up to two years), while long-term plans have no end date and pay out until you go back to work, retire, or pass away.

Why have income protection insurance?

If you have any dependents that rely on your salary then having some sort of income protection to minimise your loss of earnings can help prevent your lifestyle from being disrupted too much.

Safeguarding your income means you can continue to keep up with mortgage repayments, rent, school or university fees, as well as keep up with everyday living costs like food and fuel.

Income protection can be a valuable resource no matter what your job – from doctors to IT contractors or the self-employed, it offers peace of mind and a financial safety net.

How does income protection work?

Income protection replaces your usual salary if you become unemployed through no fault of your own.

Payouts range up to 65% of your salary and are tax free. The bigger the percentage, the higher your premium is likely to be so it’s a good idea to work out household necessities vs. ‘nice-to-haves’ before choosing the amount of cover.

If you make a claim, you’ll need to wait for the ‘deferred period’ (or excess period) to pass before your claim starts. Deferred periods vary according to insurer but can be anything from a few weeks to two years. Once your claim has started, you’ll have to wait for the Minimum Claim Period to pass before you receive your first pay out.

Long deferred periods will usually result in slightly lower premiums but they do mean you’ll need to use savings or rely on an employer’s sickness package or government help to cover your time off work.

What does income protection insurance cover?

There are three main types of income protection plan so the first thing you’ll need to do, is think about what level of cover you need or want – choose from:

Unemployment only

Sometimes called ‘redundancy insurance’ or ‘unemployment protection insurance’ this covers you if you become unemployed through compulsory redundancy.

Accident and sickness only (AS)

Provides you with an income if you become sick or are injured and unable to work.

Accident, sickness and unemployment (ASU)

This is a combined policy that covers you if you become unemployed through redundancy, illness or injury.

If you work for an organisation, you may find your employer already provides a good sick pay package that covers you for accident or illness, in which case you may only need unemployment cover.

If you’re thinking about income protection, it’s easy to confuse personal accident cover as an option, but these aren’t quite the same. Rather than a replacement to your monthly wage for a period of time, personal injury policies usually offer you a one-off lump sum payment if you have an accident that stops you from working.

Personal accident plans can also be changed at the discretion of the insurer but income protection plans are more strictly controlled and their terms and conditions cannot easily be changed.

You can also opt for mortgage payment protection insurance (or MPPI) which is similar to income protection in the sense that it pays out if you’re made redundant, become sick or injured. The main difference is that MPPI specifically covers the cost of your mortgage with payments limited to around 12 months and a percentage of your salary.

It’s important to make sure you fully understand all the terms and conditions of your policy – whether that’s income protection, personal accident plan or MPPI. Different levels of cover and different insurers will have their own limits and conditions so always double check the small print.

Types of income protection insurance

Long-term income protection policies can generally be split into three categories:

Guaranteed policies
The price of your premium stays the same for as long as you own the policy (although if you decide to increase the amount of cover, this will be reflected in your premium).
Reviewable policies
Policy premiums are reviewed annually by your insurer who takes into account any changes in your health as well as your age.
Age-related policies
Premiums increase every year as you get older.

When you search for policies, guaranteed plans will usually always look expensive to start with but because premiums stay the same (subject to any changes you make) they often give you better long-term value.

Review-able and age-related policies start off competitively priced but can end up being expensive – that’s because insurance tends to increase with age due to the association with declining health.

How much is income protection insurance?

Premiums depend very much on the policy you choose but bear in mind that cheap income protection insurance isn’t the same as value – here’s what to consider to make sure you get the most for your money:

Choose the right level of cover
don’t end up paying for unnecessary levels of cover, for example, your employer might already have a sickness and injury scheme in place meaning you’ll only need unemployment cover.
Think about the amount of cover
Policies usually pay up to 65% of your monthly salary but choosing the maximum amount is likely to mean a higher premium. To make sure you don’t over or under-insure yourself, think about the necessities you need to cover – like mortgage, rent and food and take it from there.
Premium type
whether you choose guaranteed, reviewable or age-related premiums can have a lasting impact on the cost of your premium.

Is income protection a taxable benefit?

If you own a business and want to put your income protection premium through as an expense, it is possible with some plans – although not unemployment cover. You’ll also need to bear in mind that any insurance payout you receive will be taxed.

If you take out a personal income protection plan (one you’ve bought yourself rather than through the business or received from an employer) then the money paid out is always tax free. This is because you’ve paid your premiums using income that has already been taxed.

Is income protection the same as PPI?

Income protection and payment protection insurance (PPI) aren’t the same but it’s easy to get the two mixed up.

Income protection gives you (the policyholder) a monthly, tax-free income to replace your usual salary and it’s up to you how you use it. PPI, on the other hand is aimed at covering specific debts (like credit card debt) and the money is paid to the lender rather than you.

PPI is also known as loan protection insurance and isn’t a product you can currently compare on mustard.co.uk.

Find more income protection insurance information

There’s a lot to think about with income protection, which is why being able to make use of mustard.co.uk’s flexible comparison tool can help you find a policy that fits your needs.

If you want more information before making your mind up, you can explore the options by reading our guides to income protection and the different levels of cover and comparing the types of income protection insurance.

If you’re not clear on what it is you need, want to arrange a policy, or want to proceed with a quote, you can do so over the phone on 0330 022 4685.

If want to arrange a quote over the phone, you can call a friendly member of the team on 0330 022 4685

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