Six income protection misconceptions that could put your finances at risk

If you or your partner became unable to work due to illness or injury, you’d want the security of knowing your financial needs were taken care of.

Income protection offers regular payments to supplement your lost income in the event that your health prevents you from working. However, according to IFA Magazine, 76% of UK adults don’t have income protection.

But even those with a policy may not have suitable cover for their needs. Although 41% of UK adults believe they are financially protected, just 19% have sufficient cover.

Numerous misconceptions about income protection are resulting in people inadvertently putting their finances at risk. With many Brits confused about what cover is available, it can be difficult to determine what protection you need.

Whether you’re considering income protection for the first time or questioning whether your policy is suitable, read on to discover six common misconceptions to avoid.

1. “My policy would pay out enough to cover my needs if I couldn’t work”

Many people assume that their cover would be sufficient for their needs if they became unable to work. However, IFA Magazine suggests that, on average, benefits fall short of monthly expenditure by £1,200 for mortgage-holding households.

In some cases, you might opt for a lower level of cover to reduce your premium payments. Or, you might select a suitable amount and forget to review your policy as your income and costs increase over time.

To protect your finances against the risk of losing your income, it’s important to calculate how much you would need to cover your basic needs – such as your mortgage, utilities, and groceries. That way, you can ensure your cover is sufficient. You might consider reviewing your cover annually to check it still meets your needs.

Learn about our protection and insurance support services.

2. “Income protection pays out a lump sum when you become unwell”

It’s not uncommon to be confused by the difference between income protection and critical illness cover. Whilst they both offer protection in the event of illness, there are distinct differences.

FT Adviser reports that 27% of people surveyed believed that income protection pays out a lump sum, whilst 34% believed critical illness cover would only pay out if they were unable to work.

Understanding the different types of cover available is crucial to ensuring you choose appropriate protections for your needs. In some cases, you might opt to take out both income protection and critical illness cover.

Read more: What would happen to your finances if you couldn’t work? Here’s how to plan ahead.

3. “I can expect a payout if I’m made redundant”

Research cited by Money Marketing found that 47% of homeowners believe their income protection would pay out if they lost their job due to redundancy.

However, income protection is specifically designed to replace income lost due to illness or injury, meaning the majority of policies will not pay out for redundancy.

It’s important to understand exactly what cover you have. That way, you can determine whether you need further protection to meet your needs.

4. “I don’t need protection as I don’t have a mortgage or dependents”

According to research cited by FT Adviser, 26% of people surveyed said they hadn’t taken out cover as they don’t have a mortgage, whilst 10% said it wasn’t necessary as they didn’t have children.

Regardless of your housing and family setup, you most likely rely on your income to sustain your lifestyle. If you become unable to work, it’s likely that you will still need to pay for food, utilities, and other essentials.

Without suitable protection, becoming too unwell to work could mean you’re unable to meet your basic needs for an extended period of time.

5. “Income protection is too expensive”

FT Adviser reports that 36% of those surveyed said protection wasn’t affordable.

Whilst premiums for certain levels of cover may be high, becoming too ill to work without any protection could be much more costly.

Income protection premiums vary depending on your age, health, lifestyle, and level of coverage. Unbiased reports that some people may be able to take out protection for as little as £6.14 a month, so it’s worth obtaining some quotes before deciding whether or not protection is affordable.

Of course, many people never claim on their policy. However, even if you end up not needing it, income protection can still provide valuable peace of mind that your finances are secure against the risk of illness or injury.

6. “I don’t need protection as my employer offers sick pay”

Money Marketing reports that 21% of homeowners surveyed believe that having occupational or enhanced sick pay means they don’t need income protection.

However, whilst your employer may offer to cover your absence, such sickness policies are usually limited to a defined period. What’s more, sick pay is at your employer’s discretion and contingent on you staying at the company. If you were to wait until you leave the company to take out protection, you may find your premiums have increased.

Your employer might also offer protection as a benefit of employment. As a result, you might assume you don’t need any further cover. However, the scope of these policies is generally limited, as discussed in our recent blog: 94% haven’t checked their workplace sickness benefits. Are they enough to protect your finances?

Get in touch

If you’re considering taking out income protection or wondering whether your current cover is sufficient, our Protection Specialist can help you evaluate your needs and options to find a solution that works for you.

Email us at enquiries@pen-life.co.uk or call 01904 661140.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Note that life insurance and financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.