Complete Guide to Income Protection Insurance

Income Protection Insurance and the various different types of policies seem to confuse clients. We often get enquiries for people looking for income protection insurance but what they really want is accident, sickness and unemployment insurance (ASU). In addition, when it comes to companies paying the premiums there is a lot of confusion surrounding the treatment of premiums for tax reasons. This guide will aim to address these areas and highlight various benefits and uses of this often overlooked protection policy.

Policies that help protect your income tend to fall into one of the 4 categories. These are:

  • Income Protection Insurance or Permanent Health Insurance
  • Accident Sickness and Unemployment Cover (ASU)
  • Key Person Income Protection Insurance
  • Group Income Protection Insurance

This post will hope to explore some of the main uses of the above protection types. It will attempt to demonstrate the benefits by using examples and scenarios to help you understand the possible uses for your own situation.

Damian Youell

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Income Protection Insurance Terminology

Income Protection Insurance Explained

Income Protection Insurance Definition

Income Protection Insurance is sometimes known as Permanent Health Insurance. This is because once the policy starts the policy is permanent i.e. it is not renewable each year it lasts from the start of the policy until the chosen term has finished. It provides you with a monthly income if you are unable to work due to illness or injury. You can use the benefit in any way you like from helping towards mortgage payments, household bills, pension contributions or maintaining your lifestyle. The monthly benefit is paid from the start of the qualifying or deferment period until you return to work, no longer qualify or the term finishes.

Accident Sickness and Unemployment or ASU Cover Explained

Further Details…
ASU cover is a short term income protection policy that covers you for Accident Sickness and Unemployment. It insures you for a monthly sum which is normally limited to around 60% of your gross income. At the beginning of the policy you decide on the level of cover needed. Some insurers will ask you to list the outgoings that you are going to protect and valid items will include, mortgage payments, loan repayments, childcare costs, pension contributions, council tax etc.

Another variable that influences the monthly premium of ASU cover is the deferment period. This is the time period when you make a claim that you have to wait until the insurer starts to pay out the benefit to you. The longer the deferment period then the cheaper the monthly premiums you will receive. The deferment period should not be set just to get the cheapest premium, it should instead be set to match your existing provisions. For example a policyholder that gets 3 months full pay should set the deferment period to 3 months. Then once the sick pay finishes the ASU cover will replace the income.

Most ASU cover policies will allow different deferred periods for Unemployment than is set for Accident and Sickness. This way you may set the accident and sickness part of the policy to start at 3 months if you have 3 months full pay but start the Unemployment cover option to start after 30 days or even back to day 1 if that is required.

As the ASU cover is aimed to be a short term income protection policy then the policy does not pay out indefinitely. Instead when the policy is taken out a claim term of 12, 18 or 24 months can be set. After that time frame the monthly benefit paid out on a claim will cease. Longer term Income Protection Insurance Policies exist that cover well beyond 24 months and usually up until retirement age. To determine what is the most appropriate policy and deferment period etc for you please contact me then I can find the most suitable product for your particular circumstances.

Income Protection Insurance for Key Person Purposes Explained

Questions to Ask Yourself

Although the number of key individuals may vary from one business to another, there will always be at least one key person in any given business. The obvious choice of key person will normally be some or all of the partners or members of the business.

However, clients should also consider the impact on the business of losing someone who may not have any financial stake in the business but nevertheless plays a fundamental role in its success. Questions that you should ask yourself could include

  • How easily could the business replace its expertise?
  • Would their absence affect business expansion plans or ongoing projects?
  • Would the business be in danger of losing customer orders?
  • Would it result in a loss of goodwill or hardening of suppliers’ credit terms?
  • Would the business miss their administration or management contribution?
  • Are there any loans or overdrafts dependent upon the key person?

About Income Cover for Key Man

The company takes out the policy on the life of the key person. A typical key person policy will only pay out on death. However, a key person is much more likely to become sick on either a short-term or long-term basis. The company will come up with a monthly sum assured that would enable the business to mitigate any loss that would have occurred from the key person’s loss of contribution to the business profit. For a full description including ways to calculate sums assured and trusts etc view my full guide to key person policies.

Executive Income Protection Insurance Explained

For those that own small limited companies paying their Income Protection Insurance from their own already taxed income might not always be the most cost-effective way of providing protection. As the money they are paying their monthly premiums out of has already had tax taken off it getting the company to pay their premiums could be more beneficial. Not all income protection providers offer Executive Income Protection Insurance, however, there is enough available so that the product still offers competitive premiums.

In the case of an executive income protection policy, the company will own and pay for the plan. The company can offset the costs against profit. The policy is taken out on the life of the director. As with all income protection policies, there is a limit to the amount of income that you can cover. Typically this is around 70% of your earnings. However, some executive income protection companies can offer as high as 80%. Most company directors only take a small basic wage and make the rest of their remuneration up with dividends. Usually, the insurer will allow these to be taken into account in the calculation of the maximum sum assured. As the company will be paying for the policy and deducting the costs from profit and therefore the director not paying tax on the income this is a very cost-effective way to pay for a director to protect their income.

The main drawback of the Executive Income Protection Policy is that on a claim the sum assured is paid to the company and not the director. As the income from the plan is classed as a trading receipt when the company does pay the sum assured to the director then ultimately the benefit is taxed accordingly with Tax and National Insurance. Because some of the Executive Income Protection providers allow you to cover up to 80% of the director’s income, and this is significantly more than the personal income protection policy, which is normally around 60% to 70% even though the benefit will be taxed, the sum in the hands of the director is not all that different.

The actual sum paid out at the time of claim will be based on the income that can be proved at the time of claim. Therefore if the directors remuneration is less than that which was declared on the original application then the percentage insured originally will be paid out but to the smaller income. If however, the income is bigger then the original sum assured will be paid out.

Direct or Broker

One option is to use price comparison websites and go it alone. You can use the information above that may help some of you get suitable cover. However, I would suggest using a broker like us. The benefit of this is that we will identify your situation and recommend the most suitable solution for you.

We make the process as straightforward as possible and fill in all the paperwork for you. If we deem it suitable to put the policy in trust I do this as part of the service for free. You will find the quotes I provide both competitive and explained in straightforward jargon-free language.


What is Income Protection Insurance?

Income protection insurance is also known as permanent health insurance.

Is payment protection insurance worth it?

The costs (or premiums) of payment protection insurance can be high and you may never need to use it.

What is critical illness insurance?

Critical illness only covers a very limited range of illnesses and for a shorter period of time than income protection insurance.

When do I need income protection insurance?

You will need income protection insurance when you are unable to work due to illness or an accident.

About The Author

mortgage broker damian youell

See some of Damian’s client reviews below

Damian is an experienced mortgage broker, founder of Ltd and company director. With over a decade working as a mortgage broker he has a strong understanding of hard to place mortgage cases. With hundreds of 5 star client reviews. hundreds of repeat clients his work speaks for himself.

He started as a one man band with the philosophy of putting clients needs ahead of his own. This ethos of offering excellent customer service has helped the business grow over the years. He gets satisfaction on getting cases pushed through to offer stage where other mortgage broker and companies have failed.

Throughout his time as an adviser he has carved out a niche area of advice helping clients with their business protection requirements too. Having helped hundreds of client with Relevant Life Policies, Shareholder Protection Insurance, Keyperson Policies and other important protection requirements of large to small businesses.

At home he is a family man and likes to spend his time with his four children and wife Lisa. He enjoys going on holidays spending time with friends and going for walks.