Lost income: how to protect yourself against it

If you were made redundant, or if illness or accident prevented you from working, how would you cope? While we all hope never to find ourselves in this position, it's important to make sure you're covered financially in the event of a crisis.

When it comes to deciding if you need protection insurance, it's worth considering what would happen if you or your partner became unable to work. Would you still be able to afford your rent or mortgage? What about your utility bills and weekly food shop?

First things first: check what protection you already have

You or your partner might find you're already covered in some way through a workplace benefits scheme, provided by your employer. These benefits can include:

  • life insurance
  • private medical insurance
  • sick pay
  • a type of income protection

Keep in mind that if you leave your job, or lose it, you'll also lose any associated benefits.

If you're self-employed, you're particularly vulnerable to loss of income if you're taken ill or suffer from an accident. You are unlikely to have a safety net in the form of employer benefits, and a long-term illness or disability could have a devastating financial effect.

You might find that you're entitled to state support if you're unable to work (benefits such as Personal Independence Payments or Employment and Support Allowance), but the amount you're entitled to will vary - and it's likely to be much less than you might hope.

What's the point of income protection insurance?

This type of insurance is designed to protect you in the long term if you can't work because you're sick or injured. You will be covered until you're able to work again or you reach retirement age, whichever is the earliest. Many self-employed people consider income protection insurance as a means of financial protection - but that's not to say it's only for the self-employed. 

There's usually a waiting period between the time you stop working and the point at which the policy begins to pay out. This is called the 'deferment period' and the longer it is, the cheaper the policy. For example, if your work contract includes three months of sick pay, you might want to purchase income protection insurance with a three-month deferment period to coincide with when this ends. 

And what about critical illness cover?

This provides a one-off payment if you contract a specified illness (from a list detailed on your cover). This sum could be used to pay costs related to your illness, such as alterations you might need to make to your home (eg wheelchair access), or for more general things such as paying off your outstanding mortgage.

Again, this option is often considered by self-employed people who do not have any work benefits to fall back on - but don't dismiss it if you're employed.

How can you protect yourself against redundancy?

There are a number of insurance policies out there that will help you manage financially if you are made redundant. 

If you decide to purchase a policy be sure to read the small print, as there are some situations in which you might not be covered. For example, if you've already been told that redundancies are on the cards, or if you take voluntary redundancy, the insurance may be void. Some policies may also not apply if you are self-employed.

On top of this, a lot of policies don't pay out for the first three months. So, if you think you'll be able to find a new job in that time frame, it might not be worth taking out a policy.

Payment protection insurance (PPI) is designed to cover your loan or credit card repayments for a specified period, usually 12 months, in the event of an accident, sickness or (in some cases) redundancy. It has been widely mis-sold in the past but can provide useful protection.

Another option is short-term income protection. This type of insurance can help cover mortgage payments and other outgoings if you are made redundant or are too sick to work for a short period of time. It pays out an agreed sum for a short space of time, usually 12 months.

Where to go for an insurance quote

A financial advisor can help you work out if you need to take out a protection insurance policy. They will balance any protection you already have in place with your financial priorities, such as paying off existing debts and building up your savings, looking at your long- and short-term needs. They should help you avoid buying any cover you don't actually require.

You can find an independent advisor through:

You can also purchase a protection policy directly through an insurance company - but it's worth doing your research first.

What Mumsnetters say about protection insurance

"I wish I'd sorted out insurance. I didn't think I needed it because I have a death in service benefit with work, but then I was diagnosed with breast cancer (curable, as far as these things are!) and an income insurance policy would most likely have given us a payment, which would have helped immensely as I had to stop work during treatment."

"The problem I found was that the policies I could afford had so many exclusions it was difficult to think of something that would keep me off work that was not excluded. The more comprehensive policies were very pricey. My solution is to have some savings in premium bonds to act as a cushion for if I'm off for any extended period."

"Savings are very useful anyway, as they will also cover you for a period of redundancy or anything else that life can throw your way. Remember, the amount that you actually need to live on is probably less than the amount that you do live on normally."

"Can you afford insurance? If so I would advise it for peace of mind."

Protecting Your World 

This article is provided by the Money Advice Service. All information accurate as of date of publication.

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Disclaimer: Any content in our family money section is intended as general information only. For specific advice about your personal financial situation, get advice from qualified, independent, regulated professionals.

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