The COVID-19 pandemic has led to a surge in the number of people looking to buy income protection, a type of insurance that replaces your earnings if you cannot work following sickness or injury.
This is one of the most important types of cover as it will meet your regular spending commitments while you are ill, yet only a fraction of working-age Britons have this back-up in uncertain times. Most get protection through their workplace but the numbers looking to buy a stand-alone policy have surged as policies will pay out for those who cannot work after catching coronavirus.
People insure their cars, homes, holidays and phones but rarely cover the income that pays for them.
Income protection pays tax-free replacement earnings following sickness, accident or injury.
This continues until you can return to work, or if you cannot, until age 60 or 65 typically. Policies also offer rehabilitation and counselling, to help people get back to work.
It should not be confused with Payment Protection Insurance (PPI), an inferior cover that was rampantly mis-sold by the big banks, triggering the UK’s biggest mis-selling scandal.
Income protection has fewer exclusions with an impressive 87.2 percent of claims paid last year, compared to as little as one in three for PPI.
Nor should it be muddled up with accident, sickness and unemployment (ASU) cover, which typically only pays for one or two years.
Income protection is sold by specialist insurers such as Aegon, Aviva, L&G, LV= and Vitality, after taking advice from a specialist insurance broker.
Most people do not cover their entire income but a monthly sum such as £1,000 or £1,500, which is tax-free so stretches further.
Emma Walker, the chief marketing officer at specialist insurance broker LifeSearch, said that cover is still available for most people during the pandemic but is designed for long-term conditions rather than short-term illness: “To reduce costs, payments typically start after you are unable to work for three or six months.”
Cover may be cheaper than you expect.
A 40-year-old non-smoker in good health wanting monthly cover of £1,000 payable after three months would pay premiums of between £15 and £20 a month.
If unable to work, the pay out will continue until the policyholder recovers.
Or if they do not, until age 60 in this case.
Tracey and Tim Clarke learned the value of income protection after Tracey’s eyesight deteriorated, to the point where she could no longer drive or work.
With money tight, the couple benefited from industry campaign 7 Families, which gave support to seven people who had suffered a serious or long-term illness or disability, to highlight the benefits of cover.
The Clarkes got replacement income of £600 a month for a year and spent the money on items including a laptop and assistive software, to help Mrs Clarke work.
Mrs Clarke said: “It gave us a personal case manager for information, research and support, and access to a nurse, who was the first person ever to ask Tim how he was coping with my sight loss.”
The policy also paid for genetic tests to see if children or grandchildren might lose their sight for the same reason.
“Thankfully, the tests were all negative, which was priceless reassurance,” she added.
Insurers continue to sell income protection throughout the pandemic, along with life insurance and critical illness cover, which pays a tax-free lump sum if you suffer one of a list of health problems.
Some insurers now have coronavirus exclusions, so check the small print.
Prioritise a policy that covers you if unable to do your “own occupation”, as that makes a payout more likely.
Emma Walker said that premiums will depend on your age, health and occupation: “Consider how long you can survive without your income, how much cover you need and whether you would like it to increase annually.”
Jo Douglas, a financial planner at Brewin Dolphin, said income protection can be valuable for the self-employed: “The premium is usually an indicator of how extensive cover is. If too cheap, you may only claim under specific conditions.”
While income protection is valuable, it is aimed at protecting you against illness rather than redundancy. As the pandemic recedes, job losses are now the biggest worry.
Unfortunately, income protection has little to offer the millions of workers who face losing their jobs as Government furlough schemes end.
Policies offering accident, sickness and unemployment cover have now mostly dropped the unemployment part.
Income protection is still vital cover for those worried about illness and will remain so even after the pandemic recedes.