Income protection

Income protection is a way of insuring some of your income in case you have to stop work for any length of time because of illness or injury. An income protection policy might stand on its own, or be an additional benefit in another policy. The amount you can cover depends on various different things — there’s more information about that in ‘How much are payments?’

Some policies can be renewed. They cover a five or ten year period, and you take out a new policy at the end of that time without providing any additional health information. The premiums you pay will go up, however, to reflect your age at the start of the new policy.

If you’ve already made a claim when it’s time to renew, the new policy will begin from the date you made the claim, rather than the date your old policy ended. That means you won’t have to wait any longer for money to be paid out, and that money already being paid will simply keep going.

Premiums on income protection policies can stay fixed, which means any money paid will probably also stay fixed. They might increase by a fixed amount each year, or by a variable amount linked to, for example, the Retail Price Index or National Average Earnings Index.

Some policies might include regular reviews to make sure your premiums continue to offer the cover you need. These tend to have lower premiums to begin with, compared to policies where premiums are guaranteed, but could lead to a higher premium being paid after the policy has its review.

If you stop paying premiums, you lose your cover. You can’t cash in or surrender an income protection policy, and they don’t normally pay out on death. Most will also end at a certain age, like your selected retirement age, with an upper age limit of 65.

Income protection is designed to cover you in case you’re no longer able to work because of illness or injury. That’s usually called ‘incapacity’.

The definition of incapacity differs from policy to policy, depending on the choices you made when you set it up and on your occupation. The most common definitions mean that you wouldn’t be able to:

• Work in your current occupation
• Work in any occupation you’re trained for or have experience in
• Work in any occupation at all
• Do various daily activities, like dressing, washing, eating, climbing stairs, shopping or cooking

Many policies also provide what’s called rehabilitation benefit. That means they’ll pay out some level of income if you can only go back to work in a reduced role and with a reduced income. It’s usually payable for up to six months after you return to work and as a part of the full Sum Assured on your policy. For example, if you’re being paid 60 per cent of your salary, you’ll get the balance of the income protection benefit, up to your chosen Sum Assured. The Sum Assured, is the amount we promise to pay you, so long as you pay all the premiums due for the term of your policy.

Policies may apply different definitions at different times in your life, so do check your terms and conditions carefully and speak to your policy provider or financial adviser to see what applies to you. For example, some occupation types may have upper age limits.

The amount you can insure depends on a few different things. These include your earnings and any benefits you get from your employer or other insurance policies covering illness or injury, for example employer income protection. State benefits you might be able to claim, like Statutory Sick Pay, Universal Credit or Employment Support Allowance (ESA), will also be considered. You cannot insure yourself for an amount higher than your earnings, when you take the policy out, although as explained, these can increase over the term of the policy.

As a general rule, the amount you’ll get when you make a claim will be limited to between 50% and 75% of your earnings before you were unable to work. They are not designed to replace your total income level before you were unable to work. There may be an upper limit as to how much can be paid each year, depending on the type of policy you have. You can also choose to set benefits to increase, either by a fixed percentage each year or in relation to an indexed rate like the Retail Prices Index.

When you set up your policy, you decide when payments will begin after a claim is accepted. The time between when you were first unable to work, your claim being approved and payments starting is called the deferred period. You’ll choose a set deferred period, usually of four, 13, 26 or 52 weeks, bearing in mind that longer periods usually mean lower premiums.

You would normally choose a deferred period that matches the length of time your employer will still pay you in full, after you stop work. For example, if your employer stops paying you 26 weeks after you’re no longer able to work, you’d choose a 26-week deferred period. You might also want to take into account the period for which some state income support benefits are payable. There is no payment due until the end of your selected deferred period, so if you return to work before this has expired,the claim would not go ahead.

If you have to make a second claim for the same condition, or one directly related to it, within six months of an earlier claim ending, this is called a linked claim. It won’t involve an additional deferred period so you’ll start getting payments as soon as it’s approved.

You’ll normally be paid monthly in arrears, starting in the month after the deferred period has expired For example, if your deferred period ends on 31 January, your first income payment will be paid on 28 February. Benefits may increase by an indexed rate (such as the Retail Prices Index), or a fixed percentage rate, and can be reviewed each year. Payments will be made directly to the bank account in your own name that you give to us.

That depends on your cover, but generally your policy will keep paying out until the first of these happens:

• You recover and go back to work.
• You start a new job that pays less, or go back to the old one part time, in which case part payment may continue.
• The policy term ends.
• Death.

During the period of any claim, where we are paying money to you, the monthly premium to the policy does not have to be paid. If the benefits stop being paid because you have returned to work, then you need to start paying the monthly premium, as soon as your last benefit payment is received. This will make sure the policy still provides you with cover, should you need it in the future , for a new claim.

Benefits for income protection policies are tax-free.

What are the benefit limits?

As a general rule, the amount you’ll get when you make a claim will be limited to between 50% and 75% of your earnings before you were unable to work. There may be an upper limit as to how much can be paid each year, depending on the type of policy you have. You can also choose to set benefits to increase, either by a fixed percentage each year or in relation to an indexed rate like the Retail Prices Index.

If a claim is accepted, the benefit paid will depend on any benefits you get from the state, your employer or other insurance policies that cover illness or injury. The amount you get will bring the total payment up to the percentage of your income you’ve insured.

For example, you’re paid £2,500 a month. You’ve insured 75% of that amount. You’re receiving £325 a month Universal Credit and £1,250 a month from your employer. Your income protection will pay out £300 a month, as this then totals £1,875, which is 75% of your normal monthly salary.

If your illness or injury would allow you to take on a different but less well paid occupation, your benefit payment could still make up the difference to your previous average monthly income. If you’re earning 60% of what you were making, for example, 40% of your income protection benefit would be payable until your earnings reach the level they were at before.

What are the restrictions?

Your income protection policy may only be valid while you’re resident in the UK, EU or Western Europe, USA or other developed countries. It won’t normally pay out if you’re unemployed when you become unable to work, but if it does, it will be based on your ability to perform certain ‘Activities of Daily Living’. You will need to be permanently unable to do these activities, for a claim to be accepted at this point. Some policies do allow for limited payment of benefits if you become unemployed.

You won’t receive benefits for accidents or illnesses caused by drug or alcohol abuse, criminal acts, intentional self-harm, wars and pregnancy (unless your policy includes this). Other exclusions might also apply, so please check your policy carefully before you make a decision.

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