What is income protection insurance?
Formerly known as permanent health insurance (PHI), long-term income protection (IP) is an insurance policy that pays out if you're unable to work due to injury or illness.You may have seen the Paul Whitehouse-fronted Aviva advert, or Unum's Back-up Plan adverts - both promoting income protection.
IP usually pays out until retirement, death or your return to work, although short-term IP policies are now available at a lower cost. IP doesn't usually pay out if you're made redundant, but will often provide 'back to work' help if you're off sick.
Millions of us have policies like private medical insurance and payment protection insurance, sold to us over the years by salespeople who convinced us we needed protecting. However, whilst they were right about the protection, they were often wrong about the policies. The one protection policy every working adult in the UK should consider is the very one most of us don't have - income protection.
How much does income protection pay out?
Income protection payouts are usually based on a percentage of your earnings: 50% to 70% is the norm. Payments are tax-free.
IP policies only pay out once a pre-agreed period has passed, generally ranging from one to 12 months after you put in a claim. The longer the 'deferral' period you choose, the lower your premiums. The default deferral period tends to be 13 or 26 weeks.
Most IP providers report paying high proportions of claims made to them. For 2012, insurance giant Aviva published that it had paid 93.5% of IP claims whilst LV= paid 88.4%. British Friendly and Friends Mutual paid out 97% and 98% respectively.