Income protection insurance explained

What is income protection insurance?

Income protection insurance (also called permanent health insurance or PHI) pays a regular monthly benefit if you are unable to work due to illness or injury. Unlike life insurance, it pays out while you are alive but unable to work — it is designed to replace a portion of your income until you recover, retire, or the policy term ends.

How it works

When you become unable to work, you serve a deferred period (waiting period), after which the policy pays a monthly benefit. You choose the deferred period when you take out the policy — the longer the wait, the lower the premium. The benefit continues until you can return to work, or until the policy term or state pension age, whichever comes first.

What it covers

Income protection covers inability to work due to illness or injury. Policies vary in their definition of “unable to work” — some pay if you cannot do your own occupation, others if you cannot do any occupation. The “own occupation” definition is more generous and is generally the one to look for.

What it doesn't cover

Pre-existing conditions at the time of taking out the policy are typically excluded. Some policies also exclude mental health conditions or have waiting periods for them. Redundancy or job loss due to economic reasons is not covered — that is a different product (payment protection insurance).

How much do you need?

Start by estimating your income gap: what you would receive from your employer (sick pay) plus statutory sick pay (SSP), versus what you actually need to cover essential outgoings. Use our income protection calculator to estimate the gap. Note that IPT does not apply to income protection premiums.