UK Income Protection Insurance - Unemployment Sickness Accident Redundancy

Q. What is income protection insurance?

Income protection is a policy that will pay a regular income if you suffer long term sickness or injury. Benefit usually starts after an initial waiting period that may be four, 13, 26 or 52 weeks. It is payable until you return to work, die, or the policy term expires, whichever is the earlier. Insurance of this type is also referred to as income protection insurance, long-term disability insurance income replacements insurance, disability income insurance or personal disability insurance. Do not be put off by the different names - they all mean the same.

Q. Doesn't the state come to the rescue when you are ill?

It does, but help is minimal. If you are an employee, your employer is required to pay statutory sick pay (SSP) - for the first 28 weeks of your illness. At the end of that period you have to claim for state incapacity benefit for which you must undergo a test for eligibility. Self-employed people are not entitled to SSP and have no choice but to apply for incapacity benefit. Income protection insurance, unlike state handouts, is designed to protect your standard of living during a period of long term illness.

Q. What is meant by long-term sickness or injury?

Insurance companies have different definitions of what constitutes long-term illness. To trigger the income protection insurance policy benefits you must typically demonstrate that you are unable to follow your usual occupation as a result of sickness or accident. But some income protection insurance policies insist that you must not be able to do any occupation before benefits are paid - and you should avoid these like the plague. They are a licence for insurance companies to make huge profits from your misery because making a valid income insurance claim is virtually impossible.

If you suffer a disability or illness that enable you to return to work but only on reduced earnings, maybe as a result of going part-time or taking a less well-paid job, your income protection insurance company will probably pay you a reduced benefit. This will be enough to make you financially better off working than by staying off sick, but less well off than working full-time at your normal job.

Q. How much benefit will the income protection policy pay?

The aim of an income protection policy is to replace earnings lost through sickness or injury without reducing your financial incentive to return to work. As a result, all policies set a maximum income benefit limit. This used to be 75% if average monthly earnings in the year before disablement, minus state benefits and benefits from any other disability insurance. But now income insurance benefit is between 50% and 60% of a claimant's gross salary, plus state benefits.

Q. What is the difference between critical illness and income protection insurance? Don't they both provide cover in the event of illness?

Yes, but critical illness cover provides a lump-sum payment on the diagnosis of one of a number of diseases. Income protection insurance provides a regular monthly income if you are unable to work as a result of sickness. The range of illnesses covered by income protection insurance tends to be wider than those covered by a critical illness policy, which lapses once you have made a claim. With income protection insurance, cover continues if you make a claim and later return to work.

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