5-minute guide to income protection

Tom Conner from Drewberry Insurance and Emma Thomson from LifeSearch - two firms specialising in income protection - share their tips for getting the best policy

1. What it covers

For people of working age, income protection is probably the most important form of health insurance. It replaces your salary tax-free every month if you are too ill to work, potentially until retirement or until you are well enough to return to your job. However, it can be quite complicated to understand if you don’t have a financial adviser to explain the details to you.

 2. Don't rely on state benefits

Many people assume that the welfare state will come to their rescue if illness strikes them down. But the truth is that it's intended only as a basic safety net and does not help you to maintain your usual standard of living. State benefits are becoming increasing difficult to claim too. Currently this is being highlighted by the charitable campaign Seven Families led by Disability Right UK which is encouraging people to protect against loss of income. So a personal policy is very important to be able to pay your bills and live your life in the way you wish.

3. Check your employee benefits

Employer sick pay will also pay out if you cannot work, but rarely will it pay your full salary for more than 3-6 months. Of course, if you are self-employed you may not receive anything at all. Employees should check if they receive an income protection policy through their employer before buying a personal policy because it is only possible to claim around 65-75% of salary (before tax). So if you are over-insured you may be paying for something on which you cannot claim.

 4. Opt for an ‘own-occupation’ policy

The definition under which income protection will pay out can vary between policies. The best one is called ‘own occupation’ and means you will receive your money if you are too ill to do your own job. Some of the least favourable definitions are ‘any occupation’, where you have to be too sick to do any job and not just your own, or ‘activities of daily living’, which involves an assessment to check whether you can complete a series of work-based tasks.

 5. Check your deferred period

This is the period of time that lapses between the point when you are unable to work and the point when your insurance payments begin. You can choose your own deferral period and the longer it is the less expensive the policy. So check the length of sick pay you receive from your employer and consider how long your savings will support you once any sick pay finishes. If you are self-employed you may want your policy to start paying immediately, whereas people in public sector jobs are often able to stretch their deferred period to six months or more.

6. Don’t confuse it with PPI

Payment protection insurance (PPI) has been in the news for the last few years because many policies were mis-sold alongside payment loans and credit cards. It is often referred to as ASU or short-term income protection but don’t let the name fool you. PPI will only pay for the specific debt that you bought the policy alongside, it won’t replace your income and it will only pay out for one or two years. An income protection policy bought with advice on an 'own occupation' basis, usually until you retire, is the gold standard.