Threshold Mortgage Advice

What is income protection and what does it cover?

Every year in the UK sickness or injury prevents people from leading a normal life and that includes being able to perform their job. So what do you do if you’re suddenly struck down by an unexpected illness that stops you from working?

In this blog we take a look at a type of insurance designed to step in and help in exactly this scenario: income protection cover.

Read on to learn what income protection cover actually is, the circumstances in which you might need it, and the benefits of taking out an income protection policy with an accredited insurance provider through Threshold.

What is income protection?

If you’re unable to work due to sickness or injury, it can be natural to worry about how you’ll pay your bills, mortgage and other outgoings. Not to mention, how you’ll afford day-to-day necessities like food, fuel, and medicines.

For many of us, the reality of having our income suddenly taken away is something we haven’t paused to think about. But this is exactly what could happen if you become seriously injured or ill in a way that prevents you from doing your job.

Income protection is insurance precisely for this scenario. It works by paying you a percentage of your usual take home pay, so you can still meet your outgoings and have money to live on. The payments are made in instalments, just like a salary, and (subject to your policy plan) can cover you until you return to work or retire.

What does income protection cover?

Generally speaking, income protection offers cover against illnesses or injuries that incapacitate you to the point where you’re unable to work.

How soon the payments start depends on your policy deferred period. If you’re employed and your company pays you sick pay, you may have a deferred period that reflects this. Say your employer pays sick pay for 6 months you would set a 6 month deferred period to ensure benefit commenced when employer sick pay stops.

If however you were self employed and not entitled to any sick pay it would make sense to have a short deferred period, for instance 1 month.

Does income protection cover me if I’m self-employed?

Yes, income protection does cover self-employment and is actually a very worthwhile policy for anyone whose primary revenue stream stems from freelance or contracted work.

In fact, many self-employed workers choose to take out income protection precisely because their take-home pay is reliant on their ability to work.

Income protection isn’t just there to protect the interests of the self-employed however. It can also be a lifeline to employed workers who aren’t eligible for sick pay, employees who need to take more time off work than their sick pay allows, or those who get injured to the extent they can never work again.

How long will income protection cover me if I’m off work?

How long income protection covers you all depends on the policy type you take out and the premiums you’re willing to pay, and that generally falls into two categories – short-term income protection or long-term income protection.

Short-term income protection will typically offer you cover for two years whereas a long-term income protection policy will pay out until your death or retirement date should you not be able to return to work.

Does income protection cover mortgage repayments?

It can do, providing you’ve taken these payments into account when calculating the level of income protection you need to meet your outgoings.

Your Threshold advisor will discuss the level of cover you require but this is often an amount to meet regular living costs, subject to the maximum allowed for your income.

If you’re looking to pay off your mortgage in the event you’re medically incapacitated, you might also consider Critical Illness Insurance, which pays out a one-off lump sum, subject to suffering a specified critical illness.

How does income protection work?

Generally speaking, income protection will pay you a percentage of your usual earnings, in the event that you’re medically incapacitated and unable to work. It won’t pay you the same as if you were at work, but the benefit is paid tax free so the amount of benefit you elect to have is what you will receive. It can be a lifeline if you’re ineligible for sick pay – for example, because you’re self-employed.

Most income protection payments are deferred, meaning the cover only kicks in once a certain amount of days pass from the point you notify your insurer that you want to make a claim.

If you’re entitled to sick pay, income protection will only pay out once this period of sick pay has come to an end, so you can’t claim both employee sick pay and income protection payments at the same time.

Unlike critical illness or life insurance, you can claim on an income protection policy more than once. The policy doesn’t automatically end once you make a claim.

Ready to talk about income protection?

At Threshold our protection team specialise in insurance that can provide you with financial support in the event you fall ill, get injured, or pass away. With just a few simple questions about your circumstances we can give you a quote for income protection cover from multiple insurance companies.

You can either contact us for more information or book an appointment to arrange a date and time for a member of our team to call you.

Approved by the Openwork Partnership on 01/03/2023

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