Income Protection Cover #

Income protection cover

Income protection cover (also called permanent health insurance) can pay out a tax-free income after the statutory sick period ends.

What it does

It replaces part of your income (tax free) if you are unable to work for a long period of time because of illness or disability, and will continue to pay out until you can return to some kind of paid work or reach retirement, whichever is sooner.

It has a waiting period before it will start to pay out. The longer you agree you'll wait, the lower your premiums will be, so it is important you find out what income you can get from your employer, and other insurance (such as mortgage payment protection insurance) in the event of illness or disability.

This income protection cover might not be available to you if you have existing health problems or a dangerous job.

Key things to think about

If you are an employee and you fall ill, your employer might pay you your full pay for a few weeks or months. By law, an employer must pay most employees statutory sick pay for up to 28 weeks, though this will probably be a lot less than your full earnings. After that, you would probably have to rely on State benefits.

However, some employers arrange group income protection cover for their employees as a perk of their job, which can pay out an income after the statutory sick period. So check what you are entitled to.

If you are self-employed, you won't have this option.

State benefits are not generous. You would probably see a substantial drop in your income if you were out of work for more than a few months because of illness or disability.

Income protection cover aims to put you back to the position you were in before you suffered a loss. But it does not allow you to make a profit out of your misfortune. So the maximum amount of income you can replace through insurance is broadly the after-tax earnings you have lost less an adjustment for State benefits you can claim. This usually translates into a maximum of, say 50% to 65% of your before-tax earnings.