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Aviva paid out more than £61 million in individual income protection claims last year, settling 4,330 cases with a 90.1% acceptance rate - according to their latest data.
This followed a record number of income protection policies taken out in 2023, according to data from the Association of British Insurers (ABI).
This surge suggests that more individuals recognise a need to protect their finances in case they can't work due to a serious accident or illness.
Though most employees are entitled to statutory sick pay (SSP), many opt for income protection insurance, as SSP is likely to be far lower than your usual salary.
Despite the rise in people taking out income protection, there are still many misconceptions about it. Here, we aim to clear up common myths and answer questions surrounding income protection.
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It's common to confuse income protection insurance as a type of life insurance, and while both provide financial protection, they serve different purposes.
The key difference lies in when the payouts occur. Income protection replaces lost income if you're unable to work due to illness or injury – it's there to catch you if you fall, helping cover your expenses until you're back on your feet.
Life insurance, on the other hand, is like a safety net for your loved ones in the event of death. It provides them with a lump sum of money to support them financially after you're gone.
Some life insurance policies may offer income protection as an add-on, providing a dual benefit of lump-sum payout upon death and regular income replacement during incapacity.
Basic income protection policies typically do not cover redundancy. While income protection provides financial support if you’re unable to work due to an accident or sickness, it usually doesn’t extend to redundancy.
However, some insurers may offer optional add-ons or separate policies specifically for covering redundancy, known as redundancy insurance or unemployment cover. These additional policies may provide a lump sum payment or ongoing income support if you're made redundant.
While income protection provides you with regular financial support when facing incapacity, critical illness insurance gives you a lump sum of money if you're diagnosed with a serious illness listed in the policy, regardless of whether it stops you from working.
While income protection offers ongoing financial support during times when you can’t work, critical illness insurance provides a one-time payment to help cover medical expenses or other financial needs that could arise due to a serious illness.
You can use your income protection insurance to pay for what you wish, including your mortgage.
However, there's a specific insurance called mortgage payment protection insurance (MPPI) designed for mortgage-related needs during illness, injury and, unlike typical basic income protection policies, redundancy.
It's worth noting that income protection is a more effective way of insuring against ill health than mortgage payment protection insurance. This is because you're medically assessed when you take out the policy, and you'll know in advance what you will and won't be covered for.
Additionally, some income protection policies pay out for a longer period than mortgage insurance, for example, until you can return to work or reach retirement. However, bear in mind that it’s generally more costly than MPPI.
Self-employed individuals can indeed take out income protection insurance.
Income protection could be particularly important for self-employed workers, as they typically don’t have the same benefits as employees, such as sick leave or disability benefits provided by an employer.
Income protection for the self-employed works in a similar way to policies for employees, providing regular income replacement if the policyholder is unable to work due to illness or injury.
Depending on your policy, income protection insurance may continue to provide support even after you return to work. Many income protection policies offer 'back to work' assistance, ensuring a smooth transition for policyholders recovering from illness or injury.
Say your earnings are cut down due to your health condition, then income protection may continue paying out at a reduced rate, aligned with your reduced earnings until you fully recover. Once your earnings recover to the level when you took out the policy, income protection payments may cease.
Find out more and get advice on income protection using the service provided by LifeSearch. Discover more.
While income protection insurance provides valuable financial support during incapacity, it typically covers only a portion of your salary, not the full wage.
The percentage of income covered by an income protection policy usually ranges from 50% to 70%, depending on the policy terms and premium payments.
Sometimes, insurers may pay a higher percentage on the first part of your salary, like the initial £50,000, and a lower percentage on the remainder. But the bright side is that payouts from income protection policies are tax-free.
Income protection insurance generally doesn’t pay out immediately after an illness or injury. Instead, income protection policies have a predefined waiting period, known as the deferral period, before payouts start.
This deferral period can generally range from one to 12 months after you were taken ill, with longer waiting periods often associated with lower premiums.
Choosing a longer deferral period can lower your premiums. Typically, the default deferral period is 13 or 26 weeks, but it can be as short as four weeks. How the insurer defines your inability to work also affects when your income protection policy pays out.
It’s wise to plan your finances accordingly to cover expenses during the deferral period without relying solely on income protection payments.
It's not entirely accurate to say that income protection insurance never covers pre-existing conditions. Sometimes it does, but there are usually conditions and higher premiums involved.
When you apply for this insurance, you'll need to disclose any existing health issues. The insurer will then decide if they can cover you, and they might add conditions like excluding coverage for your pre-existing condition or charging you more because of the added risk.
Whether you can get coverage for a pre-existing condition depends on factors such as its severity and how well you manage it. If your condition isn't too severe and you manage it effectively, you might qualify for cover at the standard price. However, if it's more serious or could hinder your ability to work, the insurer might not cover it or may ask you to pay more for the insurance to account for the increased risk.
