Income protection insurance pays you a regular, tax-free income if you cannot work because of illness or injury. Instead of a one-off lump sum, it tops up your finances month by month until you recover, retire, or the policy ends, whichever comes first. In short, it insures the thing most of your life is actually built on: your ability to earn.

It is also one of the most overlooked types of cover in the UK. According to the Financial Conduct Authority's Financial Lives research, only around 6% of UK adults hold an income protection policy, which is a striking number when you consider how many of us would be in real trouble within months of our pay stopping. This guide explains what income protection insurance is, what it does and does not cover, and how to weigh up whether it is worth it for you.

What is income protection insurance?

Income protection insurance is a policy that replaces part of your income if illness or injury stops you working. You pay a monthly premium, and if you cannot work and your claim is accepted, the policy pays you a regular monthly amount to help cover the essentials: the mortgage or rent, the bills, the food shop, the ordinary cost of keeping life going.

The key thing that sets it apart from other cover is that it pays out repeatedly, not once. A typical income protection policy keeps paying for as long as you are unable to work, up to the limits of the policy, rather than handing over a single sum and ending. That is why it is sometimes the most relevant protection of all for working-age people: for most of us, the income is the engine that everything else runs on.

What does income protection insurance cover?

This is the heart of what people want to know, so let us be specific about what income protection cover actually does. It is designed to pay out when an illness or injury leaves you unable to work, and good policies cover a broad range of reasons, including:

What income protection does not do is pay out simply because you have lost your job. That distinction trips a lot of people up, so it gets its own section next.

Does income protection cover redundancy?

Generally, no. Standard income protection insurance covers you for being unable to work due to illness or injury, not for being made redundant. People often search for whether income protection covers redundancy because they are understandably worried about losing their job, but redundancy is a different risk and is usually handled by separate, specific products. It is worth being clear on this before you buy, so the cover you hold matches the risk you actually had in mind.

How much does income protection pay, and is it taxed?

Income protection does not replace your whole salary, by design. Policies usually pay a percentage of your pre-tax earnings, commonly somewhere around half to two-thirds, rather than the full amount. There is a sensible reason for that cap: it keeps a clear incentive to return to work when you are able to, which is part of how insurers keep the cover sustainable.

The good news is that the monthly payments from a personal policy are normally paid to you tax-free, because you pay the premiums out of income you have already been taxed on. So while the headline percentage can look modest, the amount that lands in your account is closer to your usual take-home pay than the raw figure suggests.

The deferred period, explained

Here is a piece of jargon worth understanding, because it has a real effect on both your cover and your cost. The deferred period is the waiting time between becoming unable to work and the policy starting to pay. It can be anything from a few weeks to several months, and you choose it when you set the policy up.

The logic is straightforward: a longer deferred period generally means lower premiums, because the insurer pays out less often and less quickly. The trick is matching it to your real safety net. If your employer would pay you for three months, a deferred period that lines up with the end of that support can keep the cost down without leaving a gap. If you have little or no sick pay, a shorter wait may matter more.

How much does income protection insurance cost?

There is no single price, and we are not going to invent one, because the cost of an income protection policy depends on your own circumstances. The main things that move the premium are your age, your health, your job (riskier or more physical occupations tend to cost more), how much of your income you want to cover, the deferred period you choose, and how long you want payments to last if you claim. Two people the same age can pay quite different amounts based on these factors, which is exactly why looking across the market rather than at a single quote tends to pay off.

Income protection versus Statutory Sick Pay

If you are employed, it is worth knowing what you would actually fall back on, because many people assume it is more than it is. Statutory Sick Pay (SSP) is the legal minimum your employer must pay if you are off sick and eligible, and according to GOV.UK it is paid for up to 28 weeks. For most households, SSP alone is a modest amount that runs out sooner than a long-term illness might, and any additional sick pay depends entirely on your employer's own scheme.

That is the gap income protection is built to fill. It is worth checking what your employer actually offers, in writing, before assuming you are covered, because the difference between full pay for a few months and the statutory minimum is enormous if you are off work for a year.

Income protection versus critical illness cover

These two get confused constantly, and they solve different problems. Critical illness cover pays a single tax-free lump sum if you are diagnosed with one of the specific serious illnesses listed in the policy. Income protection pays a regular monthly income for a much broader range of reasons you cannot work, for as long as you are unable to, up to the policy limits. One is a lump sum for a defined list of conditions; the other is ongoing income replacement. Neither is automatically better, and some people hold both, alongside life insurance, so that the lump-sum, the monthly-income and the death-benefit risks are each covered. Which combination fits is a question for advice rather than a blog.

Income protection for the self-employed

If you work for yourself, this is worth paying close attention to, because you have no employer sick pay and no SSP to fall back on at all. For the self-employed, income protection is often the only safety net standing between an illness and a serious financial problem, which is why income protection for self employed people is such a common search. Policies can be arranged to suit self-employed income, though insurers will look at how your earnings are evidenced, so it is worth going in with your figures to hand.

Already covered through work? Worth a look

Some people do have cover without realising it, through a group income protection scheme provided by their employer, sometimes arranged with a large provider such as Legal & General. If you have it, it is genuinely valuable, but it is worth understanding what it actually pays, for how long, and whether it ends if you leave the job. Workplace cover has a habit of being filed under "sorted" and never looked at again, and our Reconnect service exists to help people check exactly this kind of thing, often ending with simple reassurance that what you have is fine.

Do you need income protection, and is it worth it?

We would rather be straight than talk anyone into a policy. The honest test is simple: if your income stopped for six months or a year, how long could your household cope? If the answer is "not long", income protection is worth a serious look. If you have substantial savings, a partner whose income would comfortably carry the household, or generous long-term sick pay from work, the case is weaker, and an honest review might well conclude you are already covered.

There is a quiet irony worth sitting with, though. Plenty of us insure our phones, our cars and our holidays without a second thought, while the income that pays for all of them goes uninsured. Given that only around 6% of UK adults hold income protection, the gap between how much we rely on our earnings and how rarely we protect them is hard to ignore.

The bottom line

Income protection insurance is, for many working-age people, the most directly useful cover there is, because it protects the income everything else depends on. It pays a regular, tax-free income if illness or injury stops you working, covers a broad range of physical and mental health reasons, but not redundancy, and pays a percentage of your salary after a deferred period you choose. Whether it is worth it comes down to how exposed your household would be if your pay stopped, and that is exactly the sort of thing worth working out properly. Tailored advice is available with no charge for the conversation and no obligation, so you can decide on the facts of your own situation.

Frequently asked questions

What is income protection insurance?

It is a policy that pays you a regular, tax-free monthly income if you cannot work because of illness or injury. It continues paying until you recover, retire, or the policy ends, up to the policy's limits, rather than paying a single lump sum.

What does income protection insurance cover?

It covers a broad range of illnesses and injuries that stop you working, typically including serious illnesses, musculoskeletal problems, and mental health conditions such as depression and anxiety. It does not cover redundancy.

Does income protection cover redundancy?

No, standard income protection does not cover redundancy. It pays out when illness or injury prevents you from working, not when you lose your job. Redundancy is a separate risk usually handled by different products.

How much does income protection pay?

Policies usually pay a percentage of your pre-tax income, commonly around half to two-thirds, rather than your full salary. The monthly payments from a personal policy are normally tax-free, so the amount you receive is closer to your take-home pay than the headline figure suggests.

Is income protection insurance worth it?

It depends on how long your household could manage if your income stopped. If you have little in savings and limited sick pay, it can be very worthwhile. If you have substantial savings or generous workplace cover, the case may be weaker, so it is worth reviewing honestly.

Can self-employed people get income protection?

Yes. Income protection is often especially relevant for the self-employed, who have no employer sick pay or Statutory Sick Pay to fall back on. Insurers will want to see how your earnings are evidenced, so it helps to have your figures ready.

How much does income protection insurance cost?

The cost depends on your age, health, occupation, the amount of cover, the deferred period, and how long payments would last. Because these vary so much between people and insurers, comparing across the market rather than taking a single quote is sensible.

Sources

About the author

Tanweer Hussain

Here since 1999, Tanweer is a Protection expert having worked in our customer facing teams and best practice teams.

Top Quote Limited is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited, which is authorised and regulated by the Financial Conduct Authority. This article is for general information only and does not constitute financial advice or a personal recommendation. The suitability of any product depends on individual circumstances.