Photo by Sarah Agnew on Unsplash
Most people insure their car, their phone, and their home — but not their income. This gets the logic backwards. Your ability to earn money is almost certainly your most valuable financial asset. A 30-year-old earning £35,000 per year has roughly £1 million of future earnings ahead of them. If illness or injury stopped them working for years, the financial impact would dwarf any car or home loss.
Income protection insurance covers exactly this scenario — and remains significantly underused in the UK.
What Is Income Protection Insurance?
Income protection (IP) pays you a monthly income — typically 50–70% of your gross salary — if you’re unable to work due to illness or injury. Policies vary, but the core function is replacing part of your income for as long as you remain incapacitated, up to the end of the policy term (which can run to retirement age).
This is different from:
Statutory sick pay (SSP): The government minimum — £116.75 per week (2024/25) for up to 28 weeks. For most people earning above around £30,000, this leaves a significant income gap immediately.
Employer sick pay: Many employers offer enhanced sick pay beyond SSP, but the duration varies. Some pay full salary for 3 months, then half salary for 3 months, then SSP. Long-term illness beyond this period is covered by nothing unless you have a private policy.
Critical illness insurance: Pays a one-off lump sum if you’re diagnosed with a specified serious condition (cancer, heart attack, stroke). Useful but different from income protection, which covers a much wider range of conditions and pays monthly.
PPI (payment protection insurance): Historically mis-sold product that covered specific loan repayments. Not the same as income protection.
How Income Protection Works
Benefit amount: Typically 50–70% of pre-disability income. The limit exists because if IP paid 100% of income, there would be no financial incentive to return to work.
Deferred period: The waiting period before the policy pays out — typically 4 weeks, 13 weeks, 26 weeks, or 52 weeks. The longer the deferred period, the lower the premium. Choose based on how long your employer would pay sick pay — if your employer pays full salary for 6 months, a 26-week deferred period makes sense.
Policy term: Policies can pay out for a fixed period (1 or 2 years, for example) or until retirement age. “Long-term” IP that pays until retirement is more expensive but provides protection against the scenarios that matter most — serious conditions that prevent work for years.
Indexation: Some policies include inflation linking — the benefit rises with CPI or RPI over time. Worth having on a long-term policy.
What Does It Cover?
IP covers inability to work due to most physical and mental health conditions, including:
- Cancer
- Mental health conditions (depression, anxiety) — one of the most common causes of IP claims in the UK
- Back and musculoskeletal problems
- Neurological conditions
- Heart conditions
- Accidents
Pre-existing conditions may be excluded or have modified terms. Disclose medical history accurately when applying — failure to do so gives insurers grounds to reject claims.
What Does Income Protection Cost?
Premiums vary significantly based on:
– Your age (the older you are when you take it out, the higher the cost)
– Your occupation (manual trades cost more than desk jobs)
– Your income (higher income = higher benefit = higher premium)
– The deferred period (longer wait = lower premium)
– Whether you want the policy to pay until retirement or for a fixed period
Rough examples (approximate monthly premiums):
– 30-year-old, office worker, £35,000 income, 26-week deferred period, to age 65: £20–40/month
– 40-year-old, office worker, £45,000 income, 26-week deferred period, to age 65: £40–70/month
– 30-year-old, manual occupation, £30,000 income, 13-week deferred period, to age 65: £40–70/month
Use comparison sites (Cavendish Online, Drewberry, LifeSearch) to get accurate quotes for your specific situation. These figures are illustrative only.
Do You Need Income Protection?
The need depends on your financial resilience:
Strong need:
– Self-employed — no employer sick pay at all
– Employed with minimal or short-term sick pay
– Anyone with dependants relying on their income
– Anyone with significant financial commitments (mortgage, rent) that wouldn’t be covered by savings
Reduced need:
– Significant savings that could cover 12+ months of living costs
– Very generous employer sick pay scheme that covers long-term illness
– A partner whose income alone could cover essential outgoings
A useful test: if you were unable to work for 12 months due to illness, what would happen financially? If the answer involves serious hardship, you probably need income protection.
Summary
Income protection is one of the most underused but genuinely useful forms of insurance in the UK:
- It replaces 50–70% of your income if you can’t work due to illness or injury — for months or years, not just a few weeks
- Statutory sick pay is £116.75/week — for most earners, this leaves a huge gap; income protection fills it
- Mental health and musculoskeletal conditions are the most common claims — these aren’t covered by critical illness
- Longer deferred periods reduce premiums — match your deferred period to how long your employer would pay sick pay
- Self-employed people especially need this — without employer sick pay, even a few months of illness can be financially devastating
Next read: How to build a second income stream from scratch | https://moneyunpacked.co.uk/how-to-build-a-second-income-stream-from-scratch/