Income Protection

Income protection insurance is a way of making sure you still receive an income if you can't work because you are injured, too ill or disabled but you can often tack on unemployment cover if you wish. It used to be known as Permanent Health Insurance (PHI).

It is essential for the self-employed as you are more likely to be unable to work because of illness than you are to die. Even those who don't earn a salary, but are busy looking after children and running a home can benefit from this type of cover. It could help pay a parent and home-maker who had to pay for help and childcare or their partner had to give up work to look after them rather than hiring a nurse.

Many people think they don't need it as they expect the state to provide them with benefits in these cases. But the State’s Employment and Support Allowance only pays you up to £99.85 a week. The amount you receive is based on your income and the other benefits you are receiving.

Income protection cover can be long term or short term. Short-term cover is often known as ASU – accident, sickness and unemployment cover. Obviously if you're only buying insurance to give you an income for 12 or 24 months it will be cheaper than long-term cover. Long-term policies continue paying out until you are fit enough to return to work – or find another job if you have unemployment cover too. They can continue until retirement age if necessary and you can opt for one that will index-link the amount paid out so that it rises in line with inflation.

How to cut the cost?

Both long and short-term policies usually have a period of time after you stop working before they start to provide you with a monthly income. They could kick in after four weeks or 12 weeks, for example. The longer the waiting period, the cheaper the premium will be.  Check out the sick benefits on offer from your employer before deciding as there's no point paying more for one that starts after a month, if your employer will pay out for three months.

Other factors that influence the premium are the income you require, the type of work you do and your age. You can also find a cheaper quote if you reduce the age at which you would retire so that the insurer is liable for a shorter period of payments if you needed to claim.

How much will I get?

The maximum you can insure yourself for is roughly half your current income.  But since the payments are tax-free and you may also qualify for state benefits while you're out of work, it should amount to almost as much as your salary was before. Benefit payments stop when you are fit enough to return to work, and you will be assessed on a regular basis by the insurer.

Watch out

Some companies provide this cover for their employees – so do check first. Also, make sure the policy states that you must be fit enough to do your line of work rather than any work as you could find the payments will stop if you are well enough to do an undemanding or manual job that is not in keeping with your former position.  For instance, if a lawyer had a mental illness but was physically able, a policy stipulating any job may cease if he or she was able to cope with a shelf-stacker's job.