Income Protection Cover

Income protection cover is designed to provide you with a regular tax-free benefit if you are injured or too ill to work, resulting in a loss of earnings. There are three main types of product available:

  • Those designed to replace a proportion of your lost earnings;
  • Those which cover some of your living expenses – for example, your mortgage;
  • Those which provide cover for housepersons.

Being too ill to work is likely to affect your earnings. What this effect may be, and how soon it will happen, will depend on your personal circumstances. Income protection insurance is designed to reduce the impact of this loss of earnings.

Under an income protection policy, you pay regular premiums to an insurance company and, in return, they agree that – subject to certain conditions – they will pay you a benefit if you are too ill to work.

At the heart of any income protection policy is the definition of incapacity. Which definition applies to you will be decided when you take out your policy. A number of different definitions of incapacity are used by insurance companies – the most common ones are:

  • ‘own occupation’ – you will be able to claim if your incapacity is sufficient to prevent you from following your own occupation;
  • ‘any suited occupation’ – you cannot claim unless you are too ill to carry out your own occupation, and any other occupation to which you are suited, as defined in your policy;
  • ‘any occupation’ – you cannot claim unless you are too ill to carry out any job whatsoever;
  • ‘activities of daily living’ – you can only claim if you are unable to carry out a selection of everyday tasks, such as washing and dressing yourself; and
  • ‘activities of daily working’ – you can only claim if you are unable to carry out a selection of work-related tasks, such as walking, communicating and exercising manual dexterity.

Some of these definitions of incapacity may not be available for certain occupations.

There will also be a period after the start of incapacity before your benefit is paid. This is called the ‘deferred period’ and it can vary from 4 weeks to 52 weeks, although some insurers will offer cover from ‘day one’.

There is generally no limit to the number of claims that you can make.

Insurance companies offering income protection will always limit your benefit to an amount less than your normal earnings. This is because income protection benefits are free of personal income tax, and insurers are keen to encourage you to return to work.

Did you know?

  • In February 2010, 2.8 million working-age people had been receiving a key out-of-work benefit for two years or more.
  • Two-fifths of all long-term claimants of out-of-work disability benefits have mental or behaviour disorders. This is more than twice the size of the next largest group, namely those with musculo-skeletal disorders.
  • Long-term sickness or disability, as measured by people claiming out-of-work disability benefits for two years or more, is by no means mainly confined to people coming up to retirement. Just a third of those claiming these benefits for two years or more are aged over 55. A further third are aged between 45 and 54 and the remaining third are aged under 45.