Comparing the types of income protection insurance

Last updated by on July 21st, 2020

Finding yourself out of work through no fault of your own is tough, but having income protection can cushion the blow and provide you with an income while you get back on your feet – here’s what to think about.

What is income protection?

Income protection provides you with a monthly tax-free income if you find yourself out of work through illness, accident or compulsory redundancy.

The amount you receive will depend on what you’ve opted for – the most is usually 65 per cent of your monthly salary. The higher the amount of cover, the higher your premium is likely to be.

When you’ve chosen what you’d like to be covered for, you’ll then need to consider the type of policy you want – broadly speaking, income protection falls into two categories:

    Short-term income protection – which covers you for a limited period of time, typically 12 or 24 months. These include policies that compensate you for accident, sickness or unemployment (sometimes known as ASU cover) and aim to provide you with a temporary income until you get back on your feet.
    Long-term income protection – this covers you if you cannot go back to work because of a long-term illness or disability. You’ll receive a monthly income until you’re fit enough to return, until you retire, or until the policy term ends (whichever comes first).

Long-term income protection insurance vs. critical illness cover

Long-term income protection is not the same as critical illness cover – it offers a broader scope of cover paying out for a wide range of illness or disability so long as it prevents you from working.

Critical illness on the other hand pays out a lump sum but only if you’re diagnosed with a specific condition such as cancer, heart attack or stroke.

Frequently, people have their claim rejected if their condition is not ‘critical’ enough, whereas income protection is simpler – if a GP or Specialist say you are unfit to work, you can claim.

A critical illness one off payment could help pay for private medical treatment or, if big enough, it could pay off your mortgage. However, usually an ongoing income is better as lump sums get spent more quickly than you might imagine.

What types of long term income protection policy are there?

If you decide to buy long-term protection, you’ll also need to think about the type of plan that best fits your needs. You can choose from:

    Guaranteed policies – your premiums are fixed which can help you budget. The only time your premium will rise, is if you decide to increase the amount of cover. These policies might look expensive to start with, but they offer longer term value as premiums remain the same for the policy term.
    Reviewable policies – your premiums will be reviewed on a regular basis so they may rise at the discretion of your insurer (but they’ll always let you know if this happens). Some insurers won’t review your policy for the first few years, but after that it could be assessed annually. These start off competitively priced but can become increasingly expensive.
    Age related policies – the premiums on these policies will increase as you get older. Although they rise in price, the state of your health won’t have any impact on the cost of your premium so these can be a good option for anyone who would otherwise find insurance hard to find (such as smokers).
    Inflation linked policies – the amount of cover (and in turn your premiums) will increase each year to keep up with the rising cost of living. Some policies may increase by a set amount (usually a percentage) or they may rise in line with the Retail Prices Index. These policies are also known as ‘index-linked’ plans.

What’s the difference between group and personal income protection?

Group income protection (GIP) is bought by employers for their employees, it’s also sometimes called ‘employer income protection’.

Personal income protection is bought by individuals to cover themselves – here are the main differences between the two:

Group income protection features Personal income protection features
Paid by your employer (some schemes may ask you to contribute). Can be cheaper because more people are covered under one policy. Paid by you monthly
Monthly income is typically more – around 80% of your usual monthly salary. But this is subject to tax. You receive up to 65% of your monthly salary, tax free.
May cover the cost of rehabilitation depending on your group policy, helping you get better, quicker. Doesn’t usually include help with rehabilitation costs.
Policy features (such as amount and length of cover) are chosen by your employer (as they are the policyholder). You can choose the terms of your policy as you are the policyholder.
The policy will end if you leave your employer. The policy is yours and is valid for the policy term and for as long as you pay your premiums.

How much does income protection insurance cost?

Not only do costs vary by insurance provider, it’s also determined by you and the options you choose – for example:

    Your age, occupation and state of health – for example if you’re in a ‘high risk’ occupation like demolition or if your health means you’re at a higher risk of becoming ill (a smoker for instance) then this will be reflected in your premium.
    The type of policy you choose – whether you buy a short or long-term policy and what type of plan you opt for (for example a long-term inflation linked policy is likely to cost more than a short-term guaranteed premium policy).
    The occupation class you choose – these are the conditions that you need to meet in order for your policy to pay out – you can find out more in our guide How does income protection work?
    Your employer and employment sector – can also be a factor if choosing unemployment cover. As some jobs are harder to come by, some employers are already making redundancies. Highly paid jobs mean bigger claims and often longer claims, as it’s tougher to find equivalent jobs when you’re higher up the pay scale.

What is the best income insurance protection for me?

The best policy for you, will be one that offers you the protection and peace of mind you need as an individual.

Think about what you need your monthly income to cover – mortgage, rent, school fees or do you just need an amount to cover day to day expenses like food and fuel. Consider whether you have any savings that you can afford to use or if you have a partner, how much of their salary can be used to meet everyday living costs.

If your employer offers some short-term accident and sickness cover or sick pay, then you can concentrate on looking for a long-term policy to cover yourself for the broadest range of scenarios.

You’ll need to think really carefully about whether your priority is cover against unemployment/redundancy or accident/sickness.

Plus, you’ll need to think about your budget and how much you can afford to spend on premiums – for example weighing up the pros and cons of a guaranteed vs. reviewable income insurance plan.

The good news is that there is a policy to meet everyone’s budget. You should buy what you can comfortably afford and if the ideal sum is beyond your budget, it’s better to buy something rather than nothing and have some protection rather than none.

The financial impact of losing your income can be severe and lasting; it can affect your credit rating and ability to borrow money in the future if you cannot meet your current payments and fall into arrears. It will also wreck your hard earned savings (if you have any!).

Taking all of these factors into consideration will ensure you choose the amount of cover you need (as well as help determine your premium).

You can quickly and simply compare income protection insurance quotes right here. Then all you have to do is choose the policy that’s right for you.

Alternatively, if you’d prefer to get a quote over the phone please call 0330 022 4685 and one of the team will be happy to help.

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