Do you pay income tax on income protection payouts?

Income protection payouts from policies you have taken out yourself are tax-free, which is another reason they are capped at (usually) no more than 80% of your gross monthly wage. You should not be in a better position than if you were working, or there is no incentive to get back to work. Please note that the tax treatment could change in the future.

Does income protection cover stress and mental health?

Many income protection policies can cover mental health conditions, including stress, anxiety, and depression, if they stop you working and meet the policy terms. However, cover depends on the insurer, your medical history, and the exact wording of the policy. Some policies may apply exclusions or request additional medical information.

Can you claim more than once?

For example, you may claim, return to work, and then need to claim again later if another illness or injury stops you from working.

Is income protection insurance worth it? A complete guide

If illness or injury stopped you working, how long could your household manage without your usual income?

Many people insure their home, car, phone, and pets before they think about protecting the income that pays for them. Yet for many households, several months without earnings would cause a much bigger financial impact than replacing a damaged appliance or repairing a car.

Updated: 30.06.26

By Dee Myhill

That’s why insurance for income protection is worth considering if you would struggle to keep up with essential costs if you were unable to work while recovering from an illness.

This guide explains who may benefit from it, what it can cost, how long it can pay out for, and how it compares with life insurance and critical illness cover.

What is income protection, and how does it work?

Income protection insurance pays you a regular monthly income if you cannot work because of illness or injury.

It is designed to replace part of your earnings, so you can keep your household finances stable while you recover.

You choose the level of cover you need when you take out the policy, although insurers usually cap the amount you can protect at 50-70% of gross (pre-tax) earnings. Income protection is designed to support you financially, not leave you better off than you would be if you were working.

Policies offer different options; two of the most crucial are when payments would start and how the insurer defines your ability to work.

The deferred period

The deferred period is the waiting time between becoming unable to work and your income protection payments starting.

For example, if your employer pays full sick pay for three months, you may choose a deferred period of 13 weeks so that the policy payments begin when your sick pay ends.

If you are self-employed and therefore have no sick pay, you will likely need a shorter deferred period. However, policies with shorter deferred periods cost more.

Own occupation cover

Income protection policies use different methods to determine whether your claim is successful. One of the most important is whether the policy covers your own occupation.

An “own occupation” policy pays out if illness or injury stops you from doing your specific job. This usually gives stronger protection than a policy that only pays if you cannot do another suitable job, or any job at all.

For example, a builder, dentist, surgeon, or driving instructor may be unable to do their own work, even if they could theoretically do a different type of work.

This is an important consideration because a policy with a lower premium may look attractive, but the terms under which the policy will payout are important. Instead of looking only at whether you can return to your own job, the insurer may be able to consider whether you could do another suitable job, or any work at all. Some policies may also be based on whether you can perform routine daily activities – if you can, but you still can’t work, your policy may not payout.

Is income protection insurance worth it?

Income protection insurance is useful if losing your income would put you under financial pressure.

However, the question is not simply whether the policy pays out. You also need to ask what would happen if you couldn’t work for six months, a year, or longer?

Some employers offer generous sick pay, especially to permanent, long-term employees. If your employer will pay you for 12 months after you become ill (for example), income protection insurance may feel less important. It may also mean you can lower premiums by choosing a longer deferred period, so the policy starts when your employer’s sick pay ends.

However, not everyone has that level of support. Statutory Sick Pay is limited. In 2026/27, eligible employees can receive up to £123.25 per week (or 80% of normal weekly earnings if that is lower) for up to 28 weeks. That may help, but is unlikely to cover all of a mortgage, rent, utilities, food, and family costs.

The self-employed do not get Statutory Sick Pay, but may, depending on their National Insurance contributions record, be able to apply for New Style Employment and Support Allowance. However, there is still a significant income gap between what you may receive and your likely outgoings.

Consumer finance websites such as MoneySavingExpert often encourage people to think seriously about income protection. It can cover a wider range of illnesses and injuries than critical illness cover, because it is based on your ability to work rather than a fixed list of diagnoses.

Income protection is likely to be worth considering if you:

Are self-employed
Have limited employer sick pay
Are the main earner in your household
Need to pay a mortgage or rent
Have children or other dependants
Have limited savings
Would struggle to cover essential bills after a few weeks or months off work

Income protection insurance may not be suitable if you:

Already have generous employer income protection as a workplace benefit
Have substantial savings that could comfortably tide you over for a long period without income
Have very low outgoings and no financial dependants
Are close to retirement and have accessible pension income
Could maintain your lifestyle without your earnings

Even then, it is worth checking the details. Employer benefits can stop if you leave your job, change roles, or are made redundant. Even substantial savings can disappear quickly if an illness lasts longer than expected, and you may already have plans for those savings which you’d have to reconsider if you’ve used them to cover routine outgoings.

How much does income protection insurance cost?

The cost of income protection insurance varies widely.

For a standard policy, most individuals can expect to pay between £10 and £50 per month, depending on the level of cover chosen. However, for older applicants, smokers, or those working in high-risk manual trades, premiums can easily go up to £100+ per month.

Always remember that the cheapest quote online is not always the best value. A lower premium may mean a longer waiting period, a shorter payment term, or exclusions.

This is why taking advice from an insurance adviser, rather than searching online, can make a significant difference. An adviser can help you decide what circumstances you would want a payout for, before searching for the most suitable policy.

What affects the cost of income protection?

Several factors can affect the monthly premium, including:

Age. Cover becomes more expensive as you get older.
Health. Existing health issues may increase the cost or lead to exclusions.
Occupation. Some jobs carry a higher risk of injury or long-term absence.
Smoker status. Smokers usually pay more than non-smokers.
The deferment period. A longer waiting period can reduce the premium.
Your benefit amount. The higher the income you want to cover, the more the policy is likely to cost.
Your payment term. Long-term cover usually costs more than short-term cover.
Type of policy. For example, those offering “own occupation” cover cost more, but provide better protection.

How can you reduce the cost?

You may be able to reduce the cost of income protection by adjusting how the cover is set up.

For example, you could:

Choose a longer deferment period if you have enough savings or employer sick pay to support you before the policy starts paying.
Only cover essential monthly costs rather than trying to replace the maximum percentage of income you can.
Choose a shorter payout period that pays for one, two, or five years per claim, rather than cover that could continue until retirement.
Decide whether your monthly benefit needs to rise each year with inflation, as index-linked cover usually costs more.
Compare suitable policies through an adviser or broker rather than relying on a single direct quote.

While all of these options may lower your monthly premium, it’s important to ensure the policy still suits your needs after reducing the level of support it provides.

The aim shouldn’t be simply to find the cheapest premium, but to find cover that would work when you need it, at a cost you can afford.

How long does income protection pay out for?

Income protection policies can be taken out with a range of payout periods.

Short-term income protection

Short-term policies pay out for a set period per claim. This might be one year, two years, or five years, depending on what you choose.

These policies will have lower premiums than long-term cover and may suit people who want help through the most financially difficult period of illness or injury, but who cannot justify the cost of cover that could pay out until retirement.

However, remember that these policies may not provide enough support if you develop a long-term condition and cannot return to work.

Long-term income protection

This type of cover gives stronger protection because a serious illness or injury can affect your ability to work for many years.

It costs more, but it may be more suitable if your household heavily depends on your income.

Income protection vs critical illness vs life insurance

Different protection policies solve different problems, so before taking out a policy, you should consider what financial risk you are trying to cover.

Would your family need financial support if you died? Could a lump sum help after a serious medical diagnosis? What would keep the bills paid if illness or injury stopped you working for months or years?

The answers matter because income protection, critical illness cover, and life insurance are designed for different scenarios.

Life insurance

Life insurance pays a lump sum if you die. It is often set up so the provider will pay out if death occurs during a specified term, although policies can be set up to last for the rest of your life.

It is designed to support the people who depend on you financially. For example, it may help repay a mortgage, cover household costs, or provide for your family after your death.

It does not provide an income while you are alive and unable to work.

Critical illness cover

Critical illness cover pays a lump sum if you are diagnosed with one of the serious conditions listed in the policy.

This could help you repay debt, adapt your home, pay for treatment-related costs, or reduce financial pressure while you recover.

However, it usually only pays if your illness meets the policy definition. It will not necessarily pay out just because you cannot work.

For employers, critical illness cover for your business can also form part of an employee benefits package.

Income protection insurance

Income protection pays a regular monthly income if illness or injury stops you from working.

It can cover many reasons for being unable to work, including conditions such as mental health problems or back injuries, depending on the policy. The focus is not usually on whether you have a named condition. Instead, it is on whether you are medically unable to work.

Which one do you need?

You may need more than one type of protection.

For example, a parent with a mortgage might want life insurance to protect their family if they die, critical illness cover to provide a lump sum after a serious diagnosis, and income protection to help pay the bills if they are alive but unable to work.

A business owner may want personal income protection as well as employee benefits for staff.

The right mix depends on your income, debts, dependants, savings, and any existing employee benefits.

What does income protection not cover?

Income protection can be valuable, but it does not cover every situation.

Common exclusions or limits may include the following:

Redundancy. Income protection is designed for illness or injury, not job loss.
Pre-existing conditions. Some health conditions may be excluded, depending on the insurer and your medical history.
Normal pregnancy. Routine pregnancy and maternity leave are not usually treated as an illness.
Self-inflicted injury. Policies may exclude claims linked to self-harm.
Drug or alcohol misuse. Illness or injury linked to misuse may be excluded.
High-risk activities. Some dangerous hobbies or sports may be excluded or increase the premium.
Failure to disclose information. A claim may be refused if you did not give accurate information when applying.

Every policy is different. You should always check the policy wording and make sure you understand what is and is not covered before you buy.

FAQs

Speak to an adviser about income protection insurance

Taking out income protection insurance shouldn’t be solely about finding a policy with the lowest premium.

The value of the cover depends on details such as how much it would pay, when it would start, how long it would last, what it excludes, and whether the policy would pay if you could not do your own job.

Alan Boswell Group’s specialist income protection advisers can help you review your options and choose cover that reflects your income, outgoings, savings, sick pay, and family responsibilities. Call us today on 01603 967967 to discuss how a policy could look for you.

How do I buy income protection insurance?

Because different insurers have very different levels of cover, and different criteria for rating premiums, the best way to get the right income protection insurance is to speak to an adviser.

Alan Boswell Group can advise on a range of protection policies. Contact us to discuss your options.

Speak to us: 01603 218000

Is income protection insurance worth it? A complete guide

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