Why is income protection becoming more popular?

In a world that has been turned upside down by the Coronavirus pandemic, many people have turned to financial protection to ensure their financial future.

Life insurance has traditionally been the main contender in the financial protection market, a popular choice as it pays out to loved ones in the event of your passing to protect them from financial hardship.

But, as a direct response to the COVID-19 pandemic, income protection has become increasingly popular choice – especially amongst the younger generation.

Research suggests that nearly half (48%) of under 45s have considered purchasing income protection.  – (Source: thisismoney.co.uk)

But how does income protection work and why is it so popular? The UK’s largest life insurance broker, Reassured, examines the key characteristics of income protection…

What is income protection?

Income protection is a financial protection policy that works by paying out a percentage of your income if you become unable to work due to accident or illness.

Typically, up to 70% of your usual income will be paid out, but this amount can vary depending on which provider you secure cover with.

How does it work?

Income protection works in a similar way to many other financial protection policies.

One aspect that does differ is that you don’t choose a specific cover amount. Instead, the amount paid out to you will be a percentage of your usual gross income.

For example, you earn £50,000 per annum but unfortunately fall ill and are unable to work. You make a claim on your income protection policy, which subsequently pays out 70% of your gross salary (£35,000 per annum), until either you are able to return to your employment or until the payment period expires.

You also choose how long you would like to be covered for (policy term) and how long you would like to receive payments for (payment period length).

You pay a monthly insurance premium to keep your cover in place. If you stop paying your premiums, then your cover will simply expire.

What types of income protection are there?

The type of policy you have will be based on the definition of incapacity you choose to be covered for. This will be chosen at the point of application and, typically, there are three main options.

An own occupation definition of incapacity is the most comprehensive option as you’ll be able to make a claim and receive your payments if you’re unable to carry out your specific job role and its associated tasks.

A suited tasks (or suited occupation) definition can be slightly more complicated to make a claim on as you may be asked to carry out another similar job role (that’s suited to your skills and experience) if you’re unable to do your own.

For example, if your job requires you to be extremely active for most of the day, but you sustain a serious leg injury, you may be asked to undertake a role that will allow you to be sat behind a desk.

You’ll only be able to claim if you’re unable to do both your own role or a role that’s suited to your skillset.

Lastly, an any tasks definition means you will need to be unable to carry out any work at all for you to be able to make a successful claim. This can cause some complications as providers will often need complete disability in order for a claim to be accepted.

You have the option to choose any of the above definitions on a short term (where you’ll be covered up to a maximum of 2 years) or long term (where you have the potential to be covered up until you retire) basis.

Most insurers also offer comprehensive cover and budget options to cater for a range of needs and differing budgets.

What can income protection cover?

The benefit of income protection is that your payments aren’t tied to a specific financial commitment, so you have the flexibility to use your monthly payments as you see fit.

Unlike life insurance, which pays out a large single lump sum, income protection instead provides a regular tax-free monthly income, making it ideal for longer-term family budgeting.

Most commonly, those who receive income protection payments will use them to cover whatever their usual income would pay for. This could include:

  • Rent
  • Mortgage payments
  • Household bills
  • Other utility bills
  • Loan or debt payments
  • Transportation costs
  • Childcare costs
  • Leisure expenses

Who needs income protection?

Health and Safety Executive and the Labour Force Survey (LFS) found that between 2019 and 2020 there were 38.8 million work-related working days lost due to ill health, with an average of 17.6 days being taken off work by each individual – highlighting that income protection can be an invaluable safety net for anyone who works.

Could you and your family continue to live comfortably if you were to miss out on 17 (or potentially more) days of pay?

In particular, those who are self-employed, who don’t receive sick pay from an employer and/or don’t have a large sum of personal finance to fall back on, will likely benefit from having income protection the most.

Why has income protection grown in popularity?

The coronavirus pandemic has had a huge part to play in the popularity of income protection.

Unfortunately, throughout 2020 and even into 2021, many were left unable to work or on reduced hours – leading to a devastating blow to their finances.

This has led to a surge in people seeking ways to protect their income should they ever be unable to work.

Although income protection isn’t likely to pay out for Coronavirus (due to the short period of infection), it can provide protection against any other long term serious illness we might face in our lifetime.

How do you buy income protection?

If you’re part of the 48% of people who have been considering purchasing income protection but aren’t sure how to, it doesn’t have to be a difficult endeavour.

Income protection insurance can be purchased directly through any provider, or through a broker service (who provide cover from some of the UK’s largest providers), like Reassured.

If you are unsure of your policy options or even the application process and insurance terminology, then using an FCA-regulated broker can be a great option.

A broker can guide you through the entire application process and answer any questions you may have. Often, they will provide this service completely free of charge, as they earn their money through commission direct from the insurer upon a sale.

Often, we only realise the importance of financial protection when our personal circumstances are changed beyond our control. If the last 18 months have taught us anything it is that life can be fragile and that it’s a good idea to have cover in place, especially if you have a family who are dependent on you.