What is Income Protection Insurance?

Income protection is an essential insurance for most people, but few realise this until it is too late. 
Even Oscar Wilde, who boasted no great knowledge of financial planning, was astute enough to observe: "It is better to have a permanent income, than to be fascinating."

In those days, anyone who agreed with such sentiments was unable to insure against the possibility of losing their income.

Nowadays, most people are able to take out income protection insurance, which pays out a regular tax-free income if you are unable to work because of long-term sickness or disability, making this type of insurance one of the most important.

Who needs income protection insurance?

No-one can guarantee that they will not be the victim of an unfortunate accident or be diagnosed with a serious illness.

Research by Munich Re shows that there is at least a one in four chance of needing to claim on an income protection insurance policy during one's working life.

The fact that you are down on your luck will not stop the bills from arriving or the mortgage payments being deducted from your bank account, so going without income protection insurance could be unwise.

If you with generous employers may be entitled to sickness benefits which can, in certain circumstances, extend right up when you retire.

But the majority of employees with long-term illness will find themselves having to rely on the state for support after three months of sickness or disability.

The exact amount of state help that will be available will vary according to factors such as your age, savings levels, number of dependents and housing needs, but you can be sure that it will never allow you to do anything more than subsist.

Income protection insurance, however, can enable you to receive benefit payments of up to around half your income while you are unable to work.

These payments will continue until you recover or, if you fail to do so, until the end of the policy term - which is typically your intended retirement date.

Widespread confusion

There is considerable confusion among consumers about income protection - possibly because of the various names used to refer to it. These include 'income replacement insurance' and 'permanent health insurance (PHI).