how income protection insurance works

Wojciech

Wojciech

Diploma for Financial Advisers
Diploma in Accounting
Member of London Institute of Banking and Finance


Life can be full of unexpected events, and being unable to work due to illness or injury is one of them. That’s where income protection insurance can step in to help. This article will explain how income protection insurance works, why it might be important, and how it can provide financial security.

What Is Income Protection Insurance?

Income protection insurance is a type of policy designed to replace a portion of your income if you are unable to work due to illness or injury. Unlike other insurance types, it focuses on ensuring you can still meet your financial commitments, such as paying bills, rent, or mortgage, while you’re unable to earn.

How Does Income Protection Insurance Work?

Income protection insurance works by providing you with regular payments if you’re unable to work for medical reasons. These payments are usually a percentage of your usual earnings, often around 50-70%. You can use this money however you need—whether it’s covering household expenses, medical bills, or other living costs.

Here’s a step-by-step breakdown of how it works:

  1. Choose Your Policy: When setting up your policy, you’ll decide on the level of cover you need and how long you want the payments to last (known as the benefit period). The benefit period could range from a few years to up until retirement age.
  2. Set the Waiting Period: This is the time between when you stop working and when you start receiving payments. Common waiting periods are 4, 8, 13, or 26 weeks. Policies with longer waiting periods often cost less.
  3. Make a Claim: If you’re unable to work due to illness or injury, you’ll need to file a claim. This usually involves providing evidence from your doctor and employer.
  4. Receive Payments: Once approved, you’ll receive regular payments until you recover, reach the end of the benefit period, or return to work.

Why Is Income Protection Insurance Important?

Unexpected health issues can disrupt your life and finances. Without a steady income, managing day-to-day expenses can become challenging. Income protection insurance provides peace of mind by ensuring you’ll have financial support during tough times.

For self-employed individuals or those without generous sick pay from their employer, this type of insurance can be particularly crucial. It acts as a safety net, allowing you to focus on recovery rather than worrying about bills.

Things to Consider When Choosing Income Protection Insurance

When selecting a policy, keep the following in mind:

  • Your Budget: Premiums vary depending on your age, health, occupation, and the level of cover you choose.
  • Policy Terms: Ensure you understand the terms, including exclusions and benefit limits.
  • Your Employer’s Sick Pay Policy: If you receive generous sick pay, you may need less coverage.

Final Thoughts

Understanding how income protection insurance works is key to deciding whether it’s right for you. This type of cover offers a lifeline when you’re unable to work, helping to ease the financial burden and give you time to focus on getting better. By choosing the right policy for your needs, you can gain peace of mind and long-term security.


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