Do You Need Income Protection?

If you'd struggle to pay the mortgage and bills after a few weeks or months without your salary, the answer to do you need income protection is probably yes. Income protection is the cover most people overlook and most people would actually claim on, because it pays a regular, replacement income if illness or injury stops you working. Life insurance protects your family if you die; income protection protects you and your household while you're alive but unable to earn.

This is general information rather than personalised advice — whether it's right for you depends on your circumstances and an adviser can help you decide. It sits alongside our guide on whether you need life insurance.

What income protection is

Income protection is an insurance policy that pays you a monthly income if you can't work due to illness or injury. Typically it replaces around 50% to 60% of your gross earnings, and the payments are usually tax-free. Cover continues until you recover, return to work, reach the end of the policy term, or retire — depending on the type of plan you choose.

Unlike a lump-sum policy, it's designed to keep money coming in month after month, which is exactly what a household needs when a salary suddenly stops.

Why it's so often overlooked

Income protection is arguably the most important protection for working-age people, yet it's the least commonly held. That's usually because:

• People insure their car, phone and pet but forget to insure the income that pays for everything.
• Many assume their employer or the state would cover them for longer than is realistic.
• It feels less tangible than life insurance or a shiny lump sum.

The irony is that being off work for months through illness or injury is far more likely during your working life than dying — so this is the cover many people are statistically most likely to use.

The sick pay gap

The heart of the case for income protection is the gap between what you'd receive if you couldn't work and what you actually need.

• Employer sick pay varies enormously. Some employers offer generous cover for a period; many offer little beyond the statutory minimum.
• Statutory Sick Pay (SSP) is modest and time-limited — it's paid for up to 28 weeks and comes nowhere near a typical salary.
• State benefits may be available but are unlikely to cover a mortgage and normal living costs.
• Savings can bridge a short gap, but few households can fund many months, let alone years, out of savings alone.

Income protection is designed to fill this gap and keep paying for as long as you need, within the policy terms. The self-employed, who often have no sick pay at all, tend to feel the gap most acutely — our guide to income protection for the self-employed covers this in detail.

Deferred periods explained

When you set up a policy, you choose a deferred period — the waiting time between being unable to work and payments starting. Common options are 4, 8, 13, 26 or 52 weeks.

• A shorter deferred period means payments start sooner but costs more.
• A longer deferred period costs less and suits people with generous employer sick pay or savings to cover the early weeks.

A sensible approach is to match the deferred period to how long your sick pay and savings would realistically last, so the policy picks up where they run out.

Short-term vs long-term cover

There are two broad types, and the difference is significant.

• Short-term income protection pays out for a limited period per claim — often one, two or five years — then stops, even if you're still unwell. It's cheaper and can be useful, but it won't protect you against a long-term condition.
• Long-term (full-term) income protection continues paying, if needed, right up to the end of the policy term or your chosen retirement age. It costs more but offers the genuine security most people are looking for.

For protecting a mortgage and family over the long haul, full-term cover usually provides the peace of mind that short-term cover can't.

Who should consider it

You're likely to benefit from income protection if you:

• Rely on your income to pay the mortgage, rent or essential bills.
• Have limited or no employer sick pay — especially if you're self-employed or a contractor.
• Don't have enough savings to cover many months without earning.
• Have a family or partner who depends on your income.

If your main concern is a lump sum on diagnosis of a specific illness rather than ongoing income, it's worth comparing income protection with critical illness cover — the two do different jobs and often work well together.

Getting cover that fits

Income protection is highly customisable — the amount, deferred period, term and definition of incapacity all affect both the cover and the cost. Premiums and terms depend on your occupation, health, age and underwriting, so quotes are illustrative until an insurer assesses your application.

Wisely is an independent, whole-of-market protection specialist, and this is exactly the kind of cover bigger brokers tend to under-invest in. We'll help you set the right deferred period, choose between short and long-term cover, and size the income to your real commitments. To see whether income protection is right for you, book a free, no-obligation call with a Wisely adviser on 023 8268 1111. Big decisions, made wisely.