What would happen if you couldn't work anymore?

Jessica Amodio
Partner

The cost of living is still rising, albeit at a slightly slower rate, taking into account the latest inflation figures. But have you thought about how you would pay for the costs of living, should you be unable to work due to disability or illness? Lots of people would face financial hardship, either straight away or over a period of time, if they lost their income. This is because we all have financial commitments, such as paying for rent or a mortgage, food, and bills, which still need to be paid for. Many of us also have partners or children who rely on our income too. This article looks at why you might want to consider taking out income protection, and the difference between this type of protection and other benefits you may already have.

What is income protection?

Unlike other types of insurance, such as life or critical illness, this type of protection is not paid as a lump sum. Instead, it is paid as replacement income for the length of your policy term.

How much is paid?

You are usually entitled to a percentage of your earnings, e.g., 50% or 70%, with the payments from income protection policies being tax free.

How long is it paid for?

Income protection insurance will pay out for as long as you are unable to work through illness, until the policy term comes to an end, or until you pass away, whichever is sooner.

I have sick pay through work, do I still need income protection insurance?

Only a few employers support their staff for long periods if they're off sick from work. The amount of sick pay depends on your contract, most commonly it is either 6 or 12 months at full pay. Employer's sick pay also offer a period of half pay before reducing to the statutory minimum (currently £109.40 per week). Your deferred period on an income protection policy would take these periods into account.

What is a deferred period?

Income protection policies will pay out when the pre-agreed (deferred) period has passed. This generally ranges from 1 to 12 months after you are taken ill. The longer the deferred period, the lower the premiums. You can tie this in with any sick pay period you have through work, and also how much you may have in emergency funds.

What is index-linked income protection?

It's important to consider inflation when taking out an income protection policy. You would want to take out a policy which keeps up with the rising cost of living. To do this, you can choose an income protection policy which rises annually in line with a measure of inflation, normally consumer prices index (CPI) or retail prices index (RPI).

I have critical illness cover, what is the difference?

Critical illness cover pays out a single lump sum if you are diagnosed with (or have surgery for) potentially life threatening illnesses, whereas income protection provides a percentage of your salary as a regular payment if you can't work through illness or injury - this bridges the gap in your income until you return to work. Income protection offers a broader range of illnesses and injury. For example, if you have a bad back or depression, these are normally covered under an income protection policy, but not a critical illness policy.

If you are looking for complete reassurance and would like us to look at your personal circumstances, please do not hesitate to contact one of our advisers for more information.

This article isn’t personal advice. If you’re not sure whether a course of action is right for you, ask for financial advice.