Life & Income
Income protection is the cover most people skip and most need
Insuring possessions is instinctive; insuring the income that buys them is not. The arithmetic points the other way.
The options around income protection are set out side by side below, with the conditions that genuinely favour one over the other.
The difference in one place
- Your ability to earn is usually your largest financial asset.
- Deferred period and definition of incapacity are the two terms that matter most.
- Own-occupation cover is stronger and more expensive than any-occupation.
The asset nobody insures
For most working people, the capitalised value of future earnings dwarfs the value of the house and its contents combined. That asset is insured far less often than the possessions it pays for, which is a straightforward mismatch of priorities.
Income protection replaces a proportion of earnings when illness or injury stops you working. It is not the same as critical illness cover, which pays a lump sum on diagnosis of specified conditions.
The definition of incapacity decides everything
Own-occupation cover pays if you cannot do your own job, which is the strongest and most expensive definition. Any-occupation cover pays only if you cannot do any job you are suited to, which is a much higher bar.
The useful part is this: activities-of-daily-living definitions are more restrictive still and are commonly found in cheaper products. Comparing premiums across different definitions is comparing different products.
The deferred period is the main price lever
The deferred period is how long you must be unable to work before benefit begins — commonly four, thirteen, twenty-six or fifty-two weeks. Matching it to your employer sick pay and savings removes an expensive overlap.
Extending the deferred period reduces premium substantially and is usually a better trade than reducing the benefit amount.
Benefit is capped below your income
Insurers cap benefit at a proportion of pre-tax earnings, typically somewhere between half and two-thirds, precisely so that returning to work remains worthwhile. Over-insuring is therefore not possible in the way people assume, and paying for cover above the cap is wasted. Benefits may be tax-free or taxable depending on jurisdiction and on who pays the premium, which changes the sensible amount.
Adjust the size of it until it is something you would actually do tired.
What to check
Whether the policy is guaranteed renewable, whether premiums are guaranteed or reviewable, and how it handles a return to part-time work. Reviewable premiums start cheaper and can rise substantially at exactly the age you are least able to switch. Employer group cover often exists and is usually the cheapest starting point, if it survives you leaving the job.
Side by side
| Consideration | What it means in practice |
|---|---|
| The asset nobody insures | Your ability to earn is usually your largest financial asset. |
| The definition of incapacity decides everything | Deferred period and definition of incapacity are the two terms that matter most. |
| The deferred period is the main price lever | Own-occupation cover is stronger and more expensive than any-occupation. |
The takeaway
Insure the income first. Everything else you own is downstream of it.
The version you keep doing is the version that works.
Questions readers ask
Is critical illness cover the same thing?
No. Critical illness pays a lump sum on diagnosis of a listed condition. Income protection pays a monthly benefit while you cannot work, whatever the cause.
What if my employer already provides sick pay?
Use it to set the deferred period. If your employer pays six months, a policy that starts paying at twenty-six weeks is much cheaper than one starting at four.
