What is Income Protection Insurance?

1 Aug 2024

This guide covers the basics about Income Protection, including:

What Income Protection Insurance is and how it works
What Income Protection covers — and what it doesn’t
Group Income Protection vs individual Income Protection
Added-value services
How to get Income Protection.

What is Income Protection?

Income Protection is an insurance policy that pays a regular replacement income to someone who can’t work due to illness or injury.

It’s had various names over the years, including Permanent Health Insurance (PHI). However, it’s exactly the same thing.

There are two main types of cover:

Group Income Protection (GIP): Cover employers make available to employees — usually as part of an employee benefits package

Find out more

Individual Income Protection: Cover individuals pay for themselves to provide similar protection.

How does it work?

Income Protection pays a benefit worth a percentage of a covered individual’s gross/pre-tax earnings if illness or injury stops them working.

There’s a waiting period between someone becoming unable to work and the policy paying out (the ‘deferred period’). A common deferred period is 6 months, but individuals (for individual cover) or employers (for GIP) can choose a different period when the policy is set up to suit them in set increments from around 8 weeks to 52 weeks.

After the deferred period, if the person still can’t work, the policy starts paying out until the covered person:

Recovers so they’re well enough to return to work
Dies
No longer meets the definition of disability in the policy wording
Reaches an age limit specific to the policy (usually the individual’s State Pension Age)
Has an absence which reaches the policy’s payout limit (for policies that pay out only for a set period, e.g. 5 years, rather than to a set age).

Most policies offer a transition benefit if an individual isn’t quite well enough to return to work full-time or to a role where they were earning what they were previously. For instance, the policy might pay 50% of the insured benefit if a person can only return to work on a part-time basis and faces a 50% loss of earnings as a result.

What does Income Protection cover?

Income Protection covers illnesses, injuries and incapacities that prevent someone working.

Coverage varies based on the policy’s definition of incapacity (or inability to work). These are different thresholds that determine how your incapacity affects the type of work you can do.

For example, the ‘own occupation’ definition of incapacity covers you for illness or injury that prevents you doing your specific occupation. The ‘suited occupation’ definition covers you against illnesses or injuries that stop you doing both your own occupation and any occupation you’re suited to given your skillset and career history.

Does Income Protection cover pre-existing conditions?

Pre-existing conditions are anything someone has in their medical history before an Income Protection policy begins covering them. Coverage of pre-existing conditions differs between GIP and IIP.

For GIP, most covered employees won’t need to be medically underwritten unless their insured benefit is above a threshold called the non-medical limit or free cover limit. The non-medical limit/free cover limit is the maximum amount of cover an insurer will provide a person before they require a medical assessment, which looks at their health and lifestyle.

However, for GIP each individual must be actively at work — essentially able to be in full active employment and not off sick — before their coverage can begin.

The free cover limit means that Group Income Protection typically provides cover up to this threshold for almost any illness/injury someone might suffer. As most individuals don’t need to go through medical underwriting, this is usually true even if it’s a condition the person has suffered before. However, GIP cover may exclude some pre-existing conditions for the proportion of the benefit over the free cover limit.

Individual Income Protection, on the other hand, almost always requires medical underwriting. Insurers examine applicants’ medical histories to decide illnesses/injuries the policy won’t cover based on lifestyle risk factors and whether they’ve experienced a similar condition previously.

Does Income Protection cover redundancy?

No. Although it’s a common misconception, Income Protection does not cover redundancy. It solely provides replacement income to people unable to work through illness or injury.

Isn’t this the same cover mis-sold a few years ago?

No. That was Payment Protection Insurance (PPI), which banks and other financial institutions often mis-sold to customers to protect loan payments in case of short-term illness or redundancy. The borrower sometimes didn’t need PPI, or it was unsuitable for them — or they simply didn’t know they were paying for it at all.

Yet whilst PPI and the alternative acronym for Income Protection, PHI, are similar (which doesn’t help with the confusion) they’re different insurance policies.

Income Protection pays a replacement income based on a percentage of a covered individual’s earnings. PPI, on the other hand, generally only protected credit repayments. This is typically a far lower sum than replacing a percentage of someone’s entire income. Pre-existing conditions were often completely excluded from cover, as well as the policy having exclusions for conditions with a high claim rate, such as back pain and mental health concerns.

What’s the difference between GIP and individual protection?

Whilst there are many similarities between GIP and IIP, there are also key differences:

Group

Cover available through a person’s employer as part of an employee benefits package
The employer pays fully or in part
Pre-existing conditions are usually covered for benefits up to the non-medical limit/free cover limit
The benefit is paid to the employer who passes it on to the individual as salary. It’s therefore subject to the deduction of income tax and National Insurance contributions
Cover available up to 80% of an individual’s gross pre-incapacity earnings
The employer sets factors such as deferred period, payout length and the age the policy stops providing cover

Individual

Bought individually outside the workplace
Paid for by the individual alone, without contributions from an employer
Insurers can apply exclusions to the cover or increase premiums as part of medical underwriting
The payout is usually tax-free
Often covers a lower proportion of gross pre-incapacity earnings than GIP
The individual decides policy design such as deferred period, payout length and the age the policy stops providing cover to suit them

Added-value services

Many providers of GIP and IIP often make added-value services available to employers and employees, typically at no additional cost.

These can include:

In a perfect world, no one would become so unwell they’re unable to work. However, the reality is that people do become ill or injured. That’s why some GIP policies offer vocational rehabilitation to support people back to good health or prevent an employee’s condition deteriorating to the point they need to take time off sick.

Vocational rehabilitation specialists are typically qualified in areas such as nursing, psychology, physiotherapy, occupational therapy and more to support employees as soon as problems emerge — not just during a claim.

Employers can refer to vocational rehabilitation specialists at any time, whether it’s when someone is at work but struggling with their condition or if an employee has just gone off sick, long before a need to claim may arise.

Absence management services might use vocational rehabilitation specialists to help employers not just prevent absences but also offer support if an employee does become too ill to work.

This might include a dedicated helpline for sickness absence or wellbeing queries or support through the claims process. It can also involve helping create a return-to-work plan with the employer and the employee to discuss the best way to support employees back to work where possible. This may be on a gradual basis initially through a graduated return to work plan.
Many GIP policy providers offer employees access to an employee assistance programme (EAP).

This might include services for employees to access online, via an app or over the phone to support them with a variety of health, life, money and wellbeing concerns. Some EAPs even offer perks and savings such as cashback or discounts from major retailers.

As well as an EAP, sometimes GIP providers offer employees access to services such as:

GP appointments appointments

Mental health support

Second medical opinions

Physiotherapy

Support with diet, nutrition and exercise.

Unum’s GIP customers can access these services and more via Help@hand, the award-winning health and wellbeing app from Unum.¹
Find out more about Help@hand

^{1 Help@hand from Unum services (the ‘Services’) are provided to Unum Limited (“Unum”) customers by third-party specialist providers chosen by Unum. Unum is not the provider of the Services. The Services are entirely separate from the insurance policy provided by Unum. Access to the Services is facilitated by Unum at no cost to the Unum customer, and Unum may change or withdraw access to the Services at any time. Use of the Services are subject to the terms and conditions of the relevant third-party specialist providers. Services are available to UK residents only. For further information, please go to}^{unum.co.uk/frequently-asked-questions/services}^.

How do I buy Income Protection?

Again, there’s a difference between individual cover and GIP.

Group Income Protection

Employers arrange GIP and offer it as an employee benefit. It’s not something individuals can buy themselves.

Insurers don’t usually sell GIP direct to employers, requiring an insurance broker or independent financial adviser (IFA). The broker’s job is to advise on the setup and design of your GIP policy to ensure it meets your needs, available budget and strategic objectives. The IFA can also provide advice on relevant market and legislative issues to consider.

The decisions the adviser will help you as a business make include:

The age the policy ends
How long the policy will pay a claim
Whether it’s fully-funded by the company or part-funded with the employee
The percentage of salary it pays out
How long employees must be off work before the benefit kicks in.

The above all impact premiums.

Individual Income Protection

For individuals, a broker or an IFA is the most common route to purchasing cover. Whilst, in some instances, insurers may sell you cover directly, it’s usually beneficial to discuss your needs with an adviser so they can look at the market to find the right cover for you.

There are various websites you can use to search for an IFA — one example is Unbiased.