What is income protection insurance?

Income protection insurance is a long-term policy that pays you a regular monthly benefit if you become unable to work through illness or injury. The benefit continues until you recover and return to work, the policy term ends, or you reach the retirement age written into the plan — whichever comes first.

It is the only mainstream protection product that replaces income rather than paying a one-off lump sum. That difference is the whole point of it: a lump sum runs out, whereas a long absence from work creates a monthly hole that has to be filled every month it lasts.

1. You stop working because of a medical condition, and a doctor signs you off.
2. The deferment period runs — your chosen waiting time, typically 4 to 52 weeks. Nothing is paid during it.
3. The insurer assesses the claim against the policy definition of incapacity, using your medical evidence and your occupation.
4. The monthly benefit starts and is paid directly to you, tax-free on a personal policy.
5. Payments stop when you are fit to return, the term ends, or you reach the policy retirement age.

Many policies also pay a proportionate or rehabilitation benefit — a reduced payment if you return part-time or to a lower-paid role while recovering. It is a genuinely useful feature and worth checking for.

This single definition decides how hard your policy is to claim on. It matters more than the premium.

A middle tier, suited occupation, sits between the two: it pays if you cannot do a job suited to your education, training and experience. Better than any-occupation, weaker than own-occupation.

The deferment period is the biggest single lever on price. Extending it from 4 weeks to 26 weeks can cut the premium substantially — but only if you can genuinely survive those six months unpaid.

Check your employment contract before choosing. Guessing at your sick pay entitlement is the most common way people end up either overpaying or facing an unfunded gap.

• Full-term (long-term) — pays until recovery, the end of the term, or retirement. This is what income protection is for, and what an adviser will normally discuss first.
• Short-term / budget — caps each claim at 12, 24 or 60 months. Cheaper, and fine as a stopgap, but it will not cover the scenario the product exists for: never working again.

Premiums also come in two shapes. Guaranteed premiums are fixed for the life of the policy. Reviewable premiums start lower but the insurer can raise them, usually every five years — and they tend to rise steeply at exactly the age you most want the cover.

• Redundancy or unemployment — income protection is a medical product. Job loss cover is separate and much shorter-term.
• Pre-existing conditions — usually excluded or loaded at underwriting. Disclose everything: non-disclosure is a leading reason claims fail.
• The deferment period itself — no benefit is paid for the waiting weeks, even once the claim is accepted.
• Income above the benefit ceiling — insurers cap cover at a percentage of earnings so that claiming never pays better than working.