For many people, it definitely pays to take out income protection insurance and protect their salary.

Ask yourself the simple question: how would you manage if you found you couldn’t work for several months or more through injury or illness?

Most of us would be reliant on the generosity of our employer (who is not obliged to keep paying you), our partner, or our savings. But in the worst cases, people find they struggle to meet their mortgage costs, rent or even everyday bills. That’s why it’s considered a must-have for the self-employed – and desirable for those of us without income protection cover written into our contracts.

Right now, over 2.2 million UK workers aged between 20 and 64 are off work for six months or more – yet you are 13 times more likely to take out life insurance (which pays out when you die) than income protection insurance (which pays out if you can’t work).

We know it’s not the most cheerful reading, but income protection insurance can be as important as life insurance for many of us – yet most people don’t have it, or know anything about it.

• What is it?
• Do you need it?
• How much will it cost?
• What to watch out for
• How to get the best deal

What is it?

Income protection insurance (IPI) will provide you with a tax-free income if you are unable to work as a result of an accident or illness.

The payouts are a maximum percentage of your earnings (usually 50-60%) and will begin after you have been off work for a certain period of time (usually called the ‘deferred period’). This period varies and you can choose whether to have a shorter or longer period before you start receiving payouts, depending on your situation.

You will continue to receive payouts until you can return to work, or until the end of the policy term (usually retirement).

The insurance covers a wide range of different causes which could stop you from working. They include conditions like mental illness and chronic conditions like cancer or heart disease, among others. Essentially, IPI can provide peace of mind and offer security at times when money will be tight.

Remember! Income protection insurance almost always DOES NOT provide cover for redundancy. You can get income protection plans which offer redundancy cover as an add-on, but Money Minder’s Ray Black says these are invariably not the best policies. It’s best to steer clear of these and keep the two types of cover separate (if you need both).

How much will it cost?

It’s impossible to estimate the cost of IPI since it is based on your age, gender, occupation and general state of health. As with all insurance, the company will be assessing how much of a risk you are to them (the higher risk they perceive you to be, the more you’ll have to pay).

Different types of income protection insurance

1. Age-related – These are good for people who fall into the higher risk categories (women, smokers and those with higher risk jobs) because this type of IPI doesn’t take those factors into consideration. It starts off quite cheaply, but then the premium will increase each year.

2. Reviewable – These are reviewed by the provider after a certain time (usually five years) at which point they can increase the premium. They are cheaper than guaranteed policies, at least to begin with.

3. Guaranteed - The premium stays the same for the full term (unless you opt to increase the cover). It is more costly than the other two types, but is probably the best option if you can afford it.

Do you need it?

You need to think carefully about your financial situation when answering this. Consider the following:

1. What is your benefits package like at work? Will your employer pay you sick pay for long periods if you are forced to stop work?

Statutory sick pay is currently only £81.60 a week and can be paid by your employer for up to 28 weeks. (It’s also subject to tax and National Insurance contributions).

If your employer will pay the full 28 weeks then you can choose a policy with a longer deferred period (i.e. it doesn’t start to pay out for a longer time) as that will have considerably cheaper premiums than a policy which starts to pay out sooner.

2. Do you have sufficient savings to live off?

Obviously savings are the perfect form of self-insurance, and having an emergency savings account of some sort is essential. You need to know how much you have put aside and how long it will last you if it is to become your income. This will inform your decision on how much protection you need – you don’t want to spend more than necessary and be over-insured (but equally, you don’t want to leave yourself short and under pressure should the worst happen).

Moneymagpie says: If you find yourself answering no to both of these questions, or if you are self-employed, then you really do need income protection insurance in some form.

What about other forms of protection insurance?

With payment protection insurance (PPI) making headlines for all the wrong reasons and critical illness cover rarely doing what it says on the tin, income protection insurance is a much more reliable option for most. Why?

• Things like PPI and mortgage protection are designed to cover one cost, one specific debt, rather than day-to-day expenses and bills.
• They will also only pay out for a limited period – often only 12 months – whereas IPI will continue to pay out until the end of the policy term, or until you can return to work.

But IPI doesn’t pay out if I’m made redundant, so what do I do then? At Moneymagpie we’re reluctant to recommend redundancy insurance – it’s expensive and full of exclusions and confusing small print. Instead, why not have a look at our seven best ways to protect your income.

What to watch out for

Moneyminder’s expert Ray Black also has some sound advice on things to look out for when you are choosing a policy:

Make sure you check the maximum cover entitlements of the policy. If you qualify for means-tested benefits (such as income support) you might lose your entitlement to them when you receive income protection payouts (because they are classed as an income). The maximum cover entitlements vary between policies, so it’s worth checking to see whether or not it accounts for any state benefits.

Check whether or not you have to keep paying the premium. Some policies will ask you to continue to pay the premium even when you are claiming, so read the small print.

Only pay for what you need. The more comprehensive the cover, the more you’ll need to pay – so make sure you don’t end up over-insuring yourself. You don’t want to end up paying to cover a higher level of income than you’d ever earn anyway (especially if you’re self-employed).

Remember! There are exclusions to most Income Protection Insurance cover (such as misuse of alcohol, drugs and pre-existing medical conditions).

How to get the best deal

Our income protection insurance comparison service, powered by Money Minder, is the place to go to find yourself the right policy. Why?

• Because their service is completely free to use – there’s no fee and no obligation to buy
• You can use their finance navigator tool to get a FREE personalised financial report
• You get unprecedented choice and transparency when you search. Four price options are displayed side-by-side so you can clearly see the savings you can make (if you are confident of choosing your own product) and how much the price will be affected by taking advice from a qualified independent financial advisor.

Everyone’s different, and getting the right kind of protection is essential, so get a helping hand from Money Minder here. Finding out whether you need income protection insurance (and if so, what kind) could be crucial to you and your family’s future quality of life – not to mention your future peace of mind.