Income Protection Insurance, Plain English

If you couldn't work for 6 months because of a back injury, a serious illness, or a mental health crisis, what would you live on? Statutory Sick Pay is £116.75 a week. Most employer sick pay schemes run out within 3-12 months. Savings cover a few more months. Then what? Income Protection insurance is the product designed to fill that gap, and it's the single most important protection product for working homeowners. Here's how it actually works.

What Income Protection does

Income Protection (IP) pays a monthly benefit if illness or injury prevents you from working. Key features:

• Pays monthly, not lump sum. Replaces a chunk of your income while you can't work.
• Triggered by inability to work, usually due to illness, injury, mental health, or surgery recovery.
• Pays until you recover, retire, or the policy ends, long-term protection, not just a 12-24 month window.
• Tax-free benefits on personal policies (different rules for employer-paid schemes).
• Multiple claims possible over the policy term.

How much can you cover?

Typical maximum benefit is 50-65% of your gross income. Why not 100%? Lenders deliberately keep benefit below your working income to maintain incentive to return to work when able.

On a £50,000 salary, you'd typically be able to insure £25,000-£32,500 per year (£2,000-£2,700 per month tax-free). That replaces enough to cover mortgage, bills, and basic living costs, not your full pre-illness lifestyle.

The deferred period, your biggest cost lever

Deferred period is how long after you stop working before the policy starts paying. Longer deferred period = lower premium. Common options:

• 1 month deferred, expensive but kicks in fast. Useful for those with no employer sick pay.
• 3 months deferred, common middle ground for those with some employer sick pay.
• 6 months deferred, cheaper, suits those with 6+ months of employer sick pay or significant savings.
• 12 months deferred, cheapest, for those with very strong employer cover or large reserves.
• Match the deferred period to when your existing sick pay runs out. Don't pay for cover you don't need; don't leave a gap you can't bridge.

Own occupation vs any occupation, critical definition

Two very different ways policies define 'unable to work':

• Own occupation: pays out if you can't do YOUR specific job. The gold standard. A surgeon with a hand injury would claim under own-occupation IP even if they could theoretically do administrative work.
• Suited occupation: pays if you can't do work suited to your training and experience. Middle ground.
• Any occupation: pays only if you can't do ANY work at all. Much harder to claim. Avoid if at all possible.
• Premium difference between 'own occupation' and 'any occupation' is usually 15-30%. The claim experience difference is enormous. Always pay the extra for 'own occupation' if your budget allows.

Typical costs

Rough numbers for healthy non-smoker, age 35, 'own occupation' definition, until retirement age 65:

• £1,500/month benefit, 3-month deferred: £25-£45 per month.
• £2,500/month benefit, 3-month deferred: £40-£70 per month.
• £1,500/month benefit, 6-month deferred: £15-£30 per month.
• Premium varies significantly by occupation, office workers cheaper than tradespeople, both cheaper than emergency services.

Income Protection vs MPPI vs Critical Illness

Each does a different job:

• Income Protection: long-term illness/injury cover, replaces income until recovery/retirement. Most comprehensive.
• MPPI: short-term cover (12-24 months) for illness/injury AND involuntary unemployment. Useful for redundancy specifically.
• Critical Illness Cover: lump sum on specific serious illness diagnosis. Different trigger from IP.
• Why most working homeowners prioritise IP: probability of being off work for 6+ months sometime in your working life is high (insurance industry data suggests ~30%); probability of dying in the same period is much lower.

Self-employed and IP, particularly important

Self-employed people have no employer sick pay safety net. Statutory Sick Pay doesn't apply to most self-employed people either. The entire financial buffer if you can't work is whatever cash you have and whatever cover you've bought. Income Protection is closer to essential than optional.

Some IP policies are specifically designed for self-employed work patterns and pay based on profit rather than salary. Self-employed applicants typically need 2-3 years of accounts to evidence income for IP purposes.

Income Protection is the protection product most working homeowners need most, and the one most don't have. The probability of being unable to work for an extended period during your career is meaningful, and the financial consequences without proper cover are catastrophic. Debbie at DS Financial can find IP cover that fits your specific occupation, salary structure and budget, premiums vary widely between insurers for the same person.

General information, not financial advice. Your home may be repossessed if you do not keep up repayments on your mortgage.

Sources: MoneyHelper, Income protection insurance, Association of British Insurers, Income Protection, FCA, Insurance.