Should you have income protection insurance?

By: David Thompson

Date: 1 October 2012

Should you have income protection insurance/sick with flu{{}}Income protection insurance can be a very confusing subject and I frequently get asked a lot of questions about the different aspects of income protection.

What is income protection?

Income protection insurance provides a regular tax-free income if you can’t work because of illness or injury. It is especially important for self-employed people, who do not have the support of an employer’s sick pay, of course. Income protection can help to provide security should the worst happen.

Income protection is often mistaken for payment protection insurance but they are two different things and should not be confused. Payment protection insurance is sometimes referred to as accident, sickness and unemployment insurance. Typically, it only pays out for 12 or 18 months following a claim. The monthly benefit amount you receive is always based on an instalment of a loan or mortgage. It’s designed to protect the payment made to the provider of the loan or mortgage not the policy-holder.

Income protection is quite different and provides cover until you recover or retire. Income protection doesn’t protect your payments, but protects your salary.

Even though the state provides you with something, it is often not sufficient  because it’s currently only a maximum of up to £105.05 per week*.

What’s covered?

Each insurer has different terms so you would need to ask what theirs are. Important things to check are type of illnesses covered, how long you can claim for and what occupations they cover.

Finding the right policy is important, so check it fits your circumstances. For example, if you need an income straight away, find a policy that doesn’t involve a deferment period.

How do you know if your insurer will pay out? Claim rates are a good place to start, so make sure pay out rates are above 90%, because you can usually trust your claim will be paid out. Also check how long it takes on average for their claims to be settled, so you will have an idea of when you will receive your money.

How much will you have to pay? It costs less than you think and is calculated on the type of cover you would like and what you can afford. For example, for a monthly income of £1,650, you would only need to pay £37 each month.

Financial expert David Thompson is a chartered accountant with 25 years’ experience and is chief executive of dg mutual, a mutual society offering income protection to self-employed professionals.