What is Income Protection Insurance?

Formerly known as Permanent health insurance (PHI), Income Protection Insurance (IPI) is an insurance policy which is principally available in the United Kingdom, Ireland, Australia, New Zealand and South Africa (more information about income protection). It is an insurance policy which pays benefits to policyholders who are incapacitated and therefore unable to work due to illness or injury caused by an accident.

Income Protection Insurance normally pays out until retirement, death or your return to work. However, you can get a short-term income protection insurance plan which is available at a lower-cost, but does not cover you for life. A short-term income protection insurance plan is best for those who will only be out of work because of a brief illness or a temporary injury that needs some time to heal, but is not fully life changing.

Neither long term income insurance protection or short-term income insurance protection will pay out if you are unfortunately made redundant. Nevertheless, they will often provide you with a kind of ‘back to work’ help if you are off sick for any reason.

There is also a degree of crossover between IPI and Critical Illness Insurance and this should be discussed with your financial adviser or broker prior to arranging a policy and any subsequently required pay-out.

Income protection insurance acts as a regular replacement income if you are unable to because of ill health or injury. Usually, with income protection insurance, the policy pays out after you have been off work for around 6 months (after what is known as a deferred or waiting position). You will usually receive up to 80% of your normal salary until you return to work, reach retirement age or die – however, this is dependent on the terms and conditions of the policy.

The policy might include paying out if you can return to work, but on a reduced basis meaning you will earn less than you did previous to your illness or injury. However, what they pay out will be a reduced amount that takes your drop in your salary into account.

There is also the option of group income protection insurance, the differences between Group income protection insurance and traditional income protection insurance are the product features and that IPI is for individuals and GIP is not.

• Cover is usually available through a person’s employer
• Dependant on the group income insurance policy the employers chooses to take, it may be fully-funded by the company, fully-funded by the employee or part funded by both.
• Typically, pre-existing conditions are usually covered (so, illness or injuries you may have had previously or currently has)
• In most cases, group income protection policies that are fully-funded by the employee are usually cheaper than Income protection insurance