Before You Buy Income Protection: Definitions That Decide Your Claim

What income protection insurance does

Income protection insurance pays a monthly benefit, typically 50 to 70 percent of pre-disability income, if you are unable to work due to illness or injury. Unlike critical illness cover, it is not triggered by a specific diagnosis but by the inability to work as defined in the policy. Payments continue for the benefit period, which may be until retirement age or for a defined period such as two or five years.

The risks most people do not check before buying

The occupation definition determines when the policy pays. Own occupation policies pay if you cannot perform your specific occupation. Suited occupation policies pay only if you cannot perform any occupation for which you are suited by training and experience. Any occupation policies pay only if you cannot perform any work at all. The difference is material. A surgeon with a hand injury may be unable to practice surgery but could perform other medical roles — an own occupation policy would pay; an any occupation policy would not.

The deferred period affects the premium significantly. The deferred period is the time between becoming unable to work and the first payment. A four-week deferred period produces a much higher premium than a 26-week deferred period. The deferred period should be set to match the period your sick pay from your employer covers.

State benefits are not a reliable substitute. Statutory Sick Pay is £116.75 per week for a maximum of 28 weeks (2024 rates). Employment and Support Allowance replaces it thereafter at lower rates. These are substantially less than most workers' incomes and means-tested for some components.

Self-employed claimants face additional scrutiny. Proving income for self-employed claimants requires tax returns and business accounts. Newly self-employed individuals may find the benefit calculation is based on limited income history.

What to verify before buying

Establish which occupation definition applies. Check whether your employer provides sick pay and for how long, and set the deferred period to start just after employer sick pay ends. Confirm whether the benefit amount is index-linked to inflation during a claim. Check whether the policy covers mental health conditions, which are a leading cause of long-term absence.

Where to complain

Disputed income protection claims, particularly where the insurer applies a narrower occupation definition than the policyholder understood, are handled by the Financial Ombudsman Service.

Frequently asked questions

What is the difference between own occupation and any occupation income protection?

Own occupation policies pay if you cannot do your specific job. Any occupation policies pay only if you cannot do any paid work. Own occupation provides significantly broader protection but costs more. Most financial advisers recommend own occupation for professional and specialist workers.

Does income protection cover redundancy?

Standard income protection covers illness and injury only, not redundancy. Accident, sickness and unemployment (ASU) policies cover redundancy but are short-term products typically limited to 12 to 24 months of payments.

Can I have income protection if I am self-employed?

Yes. Income protection is particularly important for self-employed individuals who have no employer sick pay. The benefit is typically based on pre-disability net profit averaged over two to three years.

Is income protection taxable?

Personally paid income protection benefits are paid tax-free. Employer-paid group income protection benefits are typically taxable as income when received.

What happens if my income increases after I take out the policy?

The benefit is typically fixed at the level agreed at inception. Some policies offer reviewable or increasing benefit options that allow the covered amount to be increased without new underwriting up to specified limits.