This article appears as part of the Money HQ newsletter.
Is it worth getting income protection?
Income protection insurance pays a regular monthly amount if you can’t work because you’re unwell, or suffer an injury that results in a loss of earnings. Knowing that, if you suddenly couldn’t work, the mortgage and bills would still be paid, can take a real weight off your shoulders, and mean you don’t need to put your future plans on hold.
Many of the workforce would receive some sick pay benefit from their employer. But for the UK’s 4 million self-employed workers, protecting their family, home and lifestyle if they can’t work could mean dipping into their long-term savings to keep afloat. An income protection plan isn’t just a safety net for the immediate expenses, it also protects your savings and investments.
Taking out income protection insurance might mean you don’t need to put money aside in an emergency cash fund as well – so you could choose to invest that money instead in your pension, or into a Junior ISA for the children.
How income protection protects your future, as well as your present
Long-term serious conditions can force you into some difficult decisions. Without an income protection plan in place, a sudden loss of your wages could have far-reaching effects on your financial stability in the future. You may have to choose between paying the electricity bill, or school fees, or making your regular contributions to your pension and investments.
What do income protection policies cover?
In the past three years, 8% of workers had two months or more off work due to physical illness, injury, and 6% had more than eight weeks off due to a mental-health event, according to a report by insurer LV=. Almost half said they’d fall back on savings to get them through a period off work, yet 4 in 10 said they had less than three months average household outgoings in their accounts.
Income protection will cover between – 0% – 75%% of your monthly wage if you can’t work, according to Unbiased, acting as a replacement salary to help cover your outgoings. This means you can keep more of your savings and investments intact, so they can continue to earn interest or returns.
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Money issues and mental health are closely linked. Almost one in five (18%) people with mental health problems are in problem debt according to Money and Mental Health Income protection will pay out for claims related to mental-health issues, so the weight of money worries is lifted from the shoulders of those recovering.
In the past five years, Aviva, one of the UK’s largest income-protection providers, paid out £5.37 billion in individual protection claims – and 24% of claims related to a mental-health condition in 2023, the second most common reason.
Why do I need income protection if I have sick pay?
Many of us take it for granted that our employer would pay us if we had to take time off due to illness or injury. A report by the Association of Mortgage Intermediaries found that, on average, we think we could receive £123 per week statutory sick pay, with those aged 18 to 34 estimating £153 per week. In reality, it pays just £99.35 a week.
Many self-employed people will receive nothing at all – something else the report found was not well known – and would need to rely on savings, or a partner’s income.
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Only 6% of the working population have income protection. But, unsurprisingly, more than one in four of those who don’t, would like to have it.
How do I choose an income protection policy?
It can be tricky to work out which type of protection – and amount of cover – you need.
A financial adviser can talk you through the differences between policies and check to see whether income-protection payments might affect your ability to claim state benefits – or if pre-existing conditions might affect a claim, or your eligibility for insurance.
Ben Stark is a chartered financial planner with over a decade of experience advising businesses and families. He is partnered with St. James's Place Wealth Management.
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