Income Protection

Replacing your income if illness or injury stops you working

TL;DR - Income Protection in a Nutshell ⏱️

  • Pays a regular monthly income if you can’t work because of illness or injury

  • Usually covers 50–70% of your pre-tax earnings (up to 75% for group policies)

  • You choose a waiting period (deferred period) before payments start — longer waits mean lower premiums

  • Can last for a set number of years or until retirement age

  • Especially valuable if you’re self-employed or have limited sick pay from work

Why Income Protection Matters 💼

Most people insure their house and car, but far fewer insure their ability to earn a living. Yet for most of us, our income is the single biggest financial asset we have!

If you were unable to work for months (or years) because of illness or injury, how long could your savings and any employer sick pay realistically last?

Income protection is designed to answer that question by replacing a meaningful portion of your earnings so the bills, mortgage and day-to-day life can continue.

How Income Protection Works 🔄

  1. You take out a policy based on the level of income you want to protect and pay a monthly premium.

  2. If you become unable to work due to illness or injury, a claim can be started but, if accepted, won't be paid out until after the deferred period.

  3. After the deferred period, the insurer pays you a regular monthly benefit for as long as you remain unable to work (up to the maximum term of the policy).

  4. Payments usually stop when you return to work, the policy term ends, or you reach the chosen retirement age.

Key Features to Understand 🔑

Deferred Period ⏳

This is the waiting period after an initial claim is made before the benefit is payable. It is commonly 4, 8, 13, 26 or 52 weeks to tie in with the length of time that you may receive sick pay from an employer or emergency savings you have.

The longer you’re prepared to wait before the benefit starts, the cheaper the premium. This is because it is more likely that you will recover from an illness or injury and the risk is lower to the insurer.

Definition of incapacity 🏥

These are crucial to understand:

  • Own occupation – You can’t do your specific job. This is the strongest (and usually most expensive) definition.

  • Suited occupation – You can’t do a job that reasonably matches your skills and experience.

  • Any occupation – You can’t do any type of work. This is the weakest definition.

Benefit amount 💰

Most policies limit cover to around 50–70% of your gross earnings. Insurers cap the percentage so there is still a financial incentive to return to work. Group policies from employers can go up to 75%.

Policy term 📅

You can choose short-term cover (e.g. 1–5 years) or longer-term cover that runs to age 60 or 65. Some policies also work on a "day one" basis and begin paying immediately.

What Is Typically Covered? ✅

  • Illness or injury that stops you working (physical or mental health)

  • Rehabilitation and support services offered by many insurers

  • Proportionate benefit if you return to work part-time or in a lower-paid role

What Is Not Typically Covered? ❌

  • Pre-existing conditions (depending on underwriting)

  • Normal pregnancy and childbirth

  • Self-inflicted injuries

  • Alcohol or drug abuse

  • War or civil unrest

  • Unemployment (this is a different type of cover altogether)

Always check your own policy wording and discuss with a financial advisor if unsure!

Tax Treatment 💷

Again, this will need to be discussed with a financial advisor and tax consultant but typically:

  • Individual policies you pay for yourself: the monthly benefit is usually received tax-free.

  • Group schemes paid for by your employer: the benefit is normally treated as taxable income.

Group / Work-Based Income Protection 👥

Some employers offer group income protection as part of your terms of employment.

These schemes are often cheaper per person and can be easier to join, but the level of cover and definition of incapacity may be less generous than a tailored individual policy.

It’s worth checking exactly what your workplace scheme provides before deciding you don’t need anything extra.

Common Mistakes & Things to Watch ⚠️

  • Choosing a weak definition of incapacity (“any occupation”) to save money

  • Setting the deferred period too short (or too long) for your actual emergency fund and sick-pay situation

  • Assuming employer sick pay will last long enough

  • Not reviewing the cover after a pay rise or change in job

  • Forgetting that self-employed people have no employer sick pay at all

Action Steps 💡

Now that you know a little more about Income Protection, here is your homework:

  • Check what sick pay your employer currently offers and for how long.

  • Calculate roughly 50–60% of your monthly take-home pay — this is a realistic benefit target.

  • Decide how long you could cover the bills from savings (this helps choose the deferred period).

  • Look for “own occupation” cover if your budget allows.

  • Get quotes for both short-term and longer-term options so you can compare cost vs peace of mind.

  • If you’re self-employed, treat income protection as a high priority.

Your income is your most important asset so now you have learned what is required to protect it, do your best to make sure you're covered - you've got this!