Income Protection Insurance > Rightmortgageadvice.co.uk

What Does Income Protection Do?

Income protection pays out when you’re signed off work by a medical professional due to illness or injury. You choose the amount of cover and how long the policy should last, and if you become unable to work, the insurer pays a regular monthly benefit—helping you keep on top of bills, mortgage or rent, and everyday costs.

Most policies do not cover redundancy, although a small number may offer limited redundancy protection at additional cost. However, these features tend to be expensive and limited in duration—often only 12 to 24 months.

Types of Cover Available

Income protection can be tailored to suit your needs. The main options to consider are:

• Short-Term: Cover Pays for up to 2 years per claim. After that, you’d need to return to work before making a new claim for the same condition.
• Full (Long-Term) Income Protection: Pays until the end of the policy term—often your retirement age—as long as you remain unable to work.

Why Long-Term Protection Matters

While short-term cover can be useful for minor setbacks, it may not go far enough for serious or ongoing conditions. With a full income protection policy, you’re covered for as long as you're medically unfit for work, potentially even for decades.

For example, someone diagnosed with a progressive condition like Multiple Sclerosis (MS) may:

• Claim continuously for many years if they are unable to return to work at all.
• Return to work during periods of stability, then claim again in the future during relapses.
• Continue receiving cover without facing exclusions or premium increases, if the plan is set up on a guaranteed premium basis.

Guaranteed premiums mean your monthly cost remains fixed throughout the life of the policy, regardless of how many claims you make or how your health changes. This kind of long-term support offers real peace of mind—especially for younger people or those in demanding jobs where illness or burnout could impact them more than once.

Key Policy Choices of Income Protection

When setting up a policy, you’ll typically be asked to select:

• Policy Term:
  Choose how long your cover lasts—usually to a specific age like 65, or until the end of your mortgage.
• Deferred Period:
  This is the waiting period before payments begin—common options include 1, 3, or 6 months. A longer deferred period can reduce your monthly premiums.
• Benefit Amount:
  You can usually insure up to 50–60% of your gross monthly income. Payments are typically tax-free, making them more valuable than they might first appear.
• Premium Type: Most providers offer:
  1. Guaranteed premiums: Fixed for the life of the policy—more predictable.
  2. Reviewable premiums: Can increase over time, often reviewed every 5 years.
  3. Escalating (or "low-start") premiums: Start low and increase annually—can cost more over the full term.
• Indexation:
  You can choose to have your cover amount increase each year—either by a fixed amount (e.g. 5%) or linked to inflation—so that your income stays relevant over time.

Using Indexation to Keep Pace with Inflation

Over time, the value of money erodes due to inflation. Without indexation, your fixed cover amount may not stretch far enough in 10 or 20 years’ time.

To counter this, income protection plans can be set to increase annually, in one of two main ways:

• Inflation-linked indexation:
  Your benefit rises in line with official inflation metrics (such as the Retail Prices Index). Your premiums increase proportionally each year, helping maintain your real-world purchasing power.
• Fixed-rate indexation (e.g. 5% per year):
  Some plans allow you to opt for a guaranteed increase at a fixed rate. This can be particularly useful if you’re expecting steady career progression and want your protection to reflect future income.

How This Helps in Practice

Let’s say a junior solicitor takes out a policy with £2,000/month cover, escalating by 5% annually:

• In year 1: the benefit is £2,000.
• In year 5: it grows to approx. £2,550/month.
• By year 15: it reaches around £4,150/month.

This can mirror the solicitor’s likely income growth over time, without needing to reapply or answer new health questions. Importantly, indexation can also allow you to lock in lower premiums early, keeping costs manageable while building up stronger future protection.

Most insurers allow you to opt-out of the annual increase if needed, offering flexibility if circumstances change.

Important Features to Consider When Choosing Income Protection

• “Own Occupation” Definition:
  This means you’re covered if you can’t perform your specific job. It’s the most comprehensive definition and is especially important for professionals with specialised roles.
• Guaranteed Minimum Benefit:
  Many insurers offer a minimum payout level (e.g. £1,500/month), even if your income drops (e.g. due to maternity leave or part-time work).
• Cover During Career Gaps:
  Some plans still pay out even if you’re between jobs, caring for children, or not working due to other circumstances at the time you fall ill.
• Homemaker Options:
  Some providers even offer policies for non-working partners, recognising that a homemaker becoming ill could lead to extra childcare or home support costs.
• Extra Benefits:
  Some insurers include helpful extras like: Daily hospitalisation benefits, Child illness support, or Additional family support services.

Income Protection vs Critical Illness Insurance

These two types of protection are often compared but serve different purposes:

• Income Protection pays a monthly benefit if you’re medically signed off work due to any health condition affecting your ability to do your job.
• Critical Illness Cover pays a one-time lump sum if you are diagnosed with a specific, severe illness listed in the policy (like cancer, stroke, or heart attack).

Here’s how they differ, point by point:

• Income Protection:
  1. Pays monthly for as long as you're unable to work (up to the policy end).
  2. Covers a wide range of medical conditions.
  3. More affordable for most applicants.
  4. Payments stop once you’re medically fit to work again.
  5. Can be more suitable for day-to-day cost protection.
• Critical Illness Cover:
  1. Pays a single lump sum on diagnosis of a listed illness.
  2. Only applies to specific conditions.
  3. Often significantly more expensive.
  4. Payment is not linked to your ability to return to work.
  5. Can help pay off large debts or fund treatment.

Both types of cover can play a role in financial planning—but income protection often provides broader, longer-term security for those relying on their regular income.