Income Protection

Income protection is a financial product that pays out a regular, tax-free income (typically monthly) to policyholders who are unable to work due to physical or mental health conditions, accidents, or injuries. It is designed to cover essential living expenses, such as mortgage or rent payments, bills, and daily costs, ensuring financial security until the policyholder can return to work, reaches the policy’s end date, or, in some cases, retires.

• Purpose:
  • To provide a steady income stream when an individual cannot work due to long-term illness or injury.
  • To bridge the gap between limited statutory benefits (e.g., Statutory Sick Pay of £116.75 per week in 2025/26) or employer sick pay and the       policyholder’s usual income.
  • To prevent financial hardship by covering essential expenses.
• How It Works:
  • The policyholder pays a monthly or annual premium to the insurer.
  • If they become unable to work due to a qualifying condition, they submit a claim, and after a waiting period (also called the deferred period), the       insurer begins making regular payments.
  • Payments are typically tax-free and continue until the policyholder recovers, the policy term ends, or they reach retirement age, depending on the policy terms.
• Eligibility:
  • Available to employed, self-employed, or contract workers, typically aged 18–60.
  • Applicants must disclose their health, lifestyle (e.g., smoking status), and occupation, as these affect premiums and coverage.
  • Some policies exclude pre-existing medical conditions unless disclosed and accepted by the insurer.

• Benefit Amount:
  • Policies typically pay out 50–70% of the policyholder’s gross income (pre-tax earnings), though some insurers offer up to 80% for lower-risk       occupations.
  • The benefit is capped based on the policyholder’s income at the time of application (e.g., a £50,000 annual salary might yield a monthly benefit       of £2,083–£2,917).
  • For self-employed individuals, benefits are often based on average earnings over a set period (e.g., 12–24 months).
• Deferred Period:
  • The waiting period before payments begin, typically ranging from 4 weeks to 12 months (e.g., 4, 8, 13, 26, or 52 weeks).
  • Shorter deferred periods result in higher premiums, while longer periods reduce costs.
  • The deferred period is often aligned with employer sick pay (e.g., 6 months) or savings that can cover short-term absences.
• Policy Term:
  • Short-term policies: Pay out for a fixed period (e.g., 1–5 years per claim).
  • Long-term policies: Pay out until recovery, retirement, or the policy’s expiry (often age 65 or 70).
  • The term affects premium costs, with long-term policies being more expensive.
• Premium Types:
  • Guaranteed Premiums: Fixed for the policy term, offering cost certainty but typically higher initial costs.
  • Reviewable Premiums: May increase over time based on claims history, age, or insurer adjustments, but often cheaper initially.
  • Age-Banded Premiums: Increase as the policyholder ages, reflecting higher risk.
• Definition of Incapacity:
  • Policies define “inability to work” based on:
    • Own Occupation: The policyholder cannot perform their specific job (most comprehensive, ideal for specialised professions).
    • Suited Occupation: The policyholder cannot perform their job or any similar role based on their skills and training.
    • Any Occupation: The policyholder cannot perform any job at all (least comprehensive, harder to claim).
  • “Own occupation” policies are preferred but more expensive, especially for high-risk or niche professions.
• Indexation:
  • Some policies offer index-linked benefits, where payouts increase annually (e.g., in line with the Retail Prices Index or a fixed percentage like 3%) to keep pace with inflation.
  • Premiums may also rise with indexation.
• Additional Benefits:
  • Rehabilitation Support: Some policies offer access to physiotherapy, counselling, or return-to-work programmes.
  • Waiver of Premium: Premiums are paused during a claim period.
  • Hospitalisation Benefit: A small daily payment (e.g., £50–£100) if hospitalised for a specified period.

• Standard Income Protection:
  • Provides long-term income replacement for illness or injury.
  • Most common for professionals, self-employed individuals, or those without employer sick pay.
• Short-Term Income Protection (Accident, Sickness, and Unemployment Cover):
  • Pays out for a limited period (e.g., 12–24 months) and may include unemployment cover.
  • Often cheaper but less comprehensive, with stricter claim conditions.
• Executive Income Protection:
  • Designed for businesses to cover key employees, with benefits paid to the employer to offset costs (e.g., hiring temporary staff).
  • Premiums may be tax-deductible as a business expense.
• Self-Employed Income Protection:
  • Tailored for self-employed individuals, with flexible deferred periods to match irregular income patterns.
  • May use average earnings over 12–24 months to calculate benefits.
• Group Income Protection:
  • Provided by employers as an employee benefit, covering multiple staff members.
  • Often cheaper due to bulk pricing but may have less flexible terms.

• Financial Security:
  • Replaces a significant portion of income, ensuring essential expenses (e.g., mortgage payments of £1,000/month or household bills) are covered during incapacity.
  • Unlike critical illness cover, which pays a lump sum for specific conditions, income protection covers a wide range of illnesses and injuries.
• Flexibility:
  • Policies can be tailored to individual needs (e.g., deferred period, benefit amount, policy term).
  • Suitable for various professions, including self-employed individuals with no access to employer sick pay.
• Tax-Free Benefits:
  • Payouts are generally tax-free, maximising the financial support received.
• Long-Term Support:
  • Long-term policies can provide income until retirement, unlike short-term alternatives like Statutory Sick Pay (£116.75/week for up to 28 weeks in       2025/26).
• Peace of Mind:
  • Reduces stress about financial instability during illness or recovery, allowing focus on health.

• Cost:
  • Premiums can be expensive, ranging from £10–£100+/month depending on age, health, occupation, benefit amount, and deferred period.
  • Example: A 30-year-old office worker earning £40,000 with a 13-week deferred period might pay £20–£40/month, while a 50-year-old manual worker might pay £60–£100+.
• Exclusions:
  • Pre-existing medical conditions may be excluded unless disclosed and accepted by the insurer.
  • Claims may be denied for certain conditions (e.g., stress-related illnesses or back pain) unless clearly documented.
  • Self-inflicted injuries, substance misuse, or high-risk activities (e.g., extreme sports) are often excluded.
• Claim Process:
  • Claims require medical evidence (e.g., GP or specialist reports), which can delay payouts.
  • Insurers may periodically review the policyholder’s condition to confirm ongoing incapacity.
• Limited Coverage for Unemployment:
  • Standard income protection does not cover redundancy or voluntary unemployment (unlike some short-term policies).
• Complexity:
  • Choosing the right policy requires understanding terms like “own occupation” vs. “any occupation” and balancing premium costs with coverage needs.

• Premiums:
  • Premiums are paid from post-tax income and are not tax-deductible for individuals.
  • For executive or group policies, premiums paid by employers may be treated as a business expense.
• Benefits:
  • Payouts are typically tax-free for individual policies, as they are funded by the policyholder’s after-tax income.
  • For employer-funded group policies, benefits may be subject to income tax and National Insurance if treated as a taxable benefit-in-kind.
• Interaction with State Benefits:
  • Income protection payments may reduce eligibility for means-tested benefits (e.g., Universal Credit).
  • Policyholders should check how payouts affect their overall financial situation.

Income protection is particularly valuable for:

• Self-Employed Individuals: No access to employer sick pay, making income protection critical for financial stability.
• High Earners: Those with significant financial commitments (e.g., a £2,000/month mortgage) who need to maintain their lifestyle.
• Single-Income Households: Where the loss of one income would cause severe financial strain.
• Professionals in High-Risk Occupations: E.g., construction workers or healthcare professionals, where injury risks are higher.
• Individuals Without Savings: Those unable to cover living expenses for extended periods without income.

It may be less necessary for:

• Those with generous employer sick pay (e.g., 6–12 months’ full pay).
• Individuals with substantial savings or other income sources (e.g., investments).
• Those eligible for state benefits or disability pensions that cover their needs.

• Choosing a Policy:
  • Compare policies using price comparison websites or consult an independent financial adviser (IFA) to find suitable coverage.
  • Consider the deferred period: align it with employer sick pay (e.g., 26 weeks) or savings to reduce premiums.
  • Check the definition of incapacity: “own occupation” is ideal for specialised roles (e.g., surgeons, teachers).
• Cost Management:
  • Opt for a longer deferred period (e.g., 26–52 weeks) to lower premiums if savings can cover short-term absences.
  • Consider reviewable premiums for lower initial costs, but be prepared for potential increases.
  • Avoid over-insuring: a benefit of 50–60% of income is often sufficient to cover essentials.
• Health and Lifestyle Disclosure:
  • Full disclosure of medical history, occupation, and lifestyle (e.g., smoking or hazardous hobbies) is required during application to avoid claim       rejections.
  • Non-disclosure of pre-existing conditions can invalidate the policy.
• Regular Reviews:
  • Review the policy if income, job, or health changes to ensure coverage remains adequate.
  • Check for indexation to protect against inflation eroding the benefit’s value.
• Alternatives:
  • Critical Illness Cover: Pays a lump sum for specific conditions (e.g., cancer, heart attack) but doesn’t cover general incapacity.
  • Payment Protection Insurance: Covers specific debts (e.g., mortgage or credit card payments) for a short term (e.g., 12–24 months).
  • Savings or Emergency Fund: May suffice for short-term absences but not for long-term incapacity.

• Example 1: A 35-year-old office worker earning £35,000/year, non-smoker, with a 13-week deferred period and “own occupation” cover might pay £25–£45/month for a benefit of £1,458/month (50% of income).
• Example 2: A 45-year-old self-employed builder earning £50,000/year, smoker, with a 26-week deferred period and “suited occupation” cover might pay £60–£100/month for a benefit of £2,500/month (60% of income).
• Costs vary based on age, health, occupation risk (e.g., manual vs. office jobs), and policy features.

If you have a need for Income Protection, please contact us on 0800 061 46 49 or email ask@phillipscapital.info to discuss your options.