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Income protection insurance

Income protection insurance is designed to pay the insured person an agreed amount of money periodically if he is unable to work due to illness or accident. The incapacity to work can be defined in four fields: own occupation, suited occupation, any occupation and activities of daily living. Own occupation refers to the job that the person has been working before an accident or illness whereas a suited occupation term is used to describe a job that is suitable for an individual because of his educational background.

Any occupation refers to all the possible jobs in the market and insurance company in this case will pay money for the insured if his medical conditions do not allow him to work at all. Last but not least, activities of daily living include dressing, combing, eating and others. A person can choose which one of these definitions will be used by the insurance company but it is important to remember that own occupation usage in the contract is the most expensive whereas activities of daily living definition is the least expensive.

What is more, it is important to know that all income protection insurance contracts have some limitations. For example, most insurance carriers will not accept a claim on income protection policy if the incapability to work occurred because of drug or alcohol abuse, self-harm, attempt to commit a suicide or war.

Limitations to income protection insurance

A person that decided to sign an income protection insurance contract has to know that there are some limitations to every contract: benefit limit, proportionate limit and deferred period. A benefit limit means that not all previous salary will be replaced. Usually 50-70 % of previous salary is compensated. However, if a salary was very high a maximum amount compensated can be stated in the contract. A deferred period means that there is a time gap between a successful claim a nd the payment of money by the insurance company. For example, “Aviva” allows its customer to choose this period from 13 up to 104 weeks. Proportionate benefit is used for people who returned to work but now earn a lower salary or work only part-time. The insurance company compensates the difference between the current and previous salary.

The premiums of income protection insurance

The premiums paid for income protection insurance depend not only on the salary and contract conditions but also on the risk profile of the occupation of the insurance holder. The most risky professions include such professions like loggers, miners, and aircraft pilots, people who work at great heights, in open waters or in oil and gas industries.  The more risky is the occupation of a client, the more money he will have to pay with his premiums. It is important to report to the insurance company if the person changed his occupation. If the new occupation falls into a different risk profile category then the premiums may also have to be changed.

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