If you couldn't work, how long could you last?

The cover people skip, and later wish they had not

Ask most people what they would do if they could not work for six months and you get a pause, then "I suppose we'd manage".

Push a bit further and the answer is usually savings, then credit cards, then family, then the house.

Income protection is the policy that sits between "I suppose we'd manage" and actually managing. It replaces part of your monthly income when illness or injury stops you working, and it keeps paying while you remain unable to work, subject to the policy terms.

It is the least glamorous product I arrange. It is also the one that quietly does the most work, because long absences from work are considerably more common than the events people insure against more readily.

How it works

You choose a monthly benefit, usually a proportion of your earnings rather than all of them, since insurers set a maximum.

If you cannot work because of illness or injury, and the claim is accepted, the benefit starts after a waiting period and continues while you remain unable to work, up to the limits in your policy.

That is the shape of it. The detail is in four choices, and they matter far more than the headline premium.

The four decisions that define the policy

1. The deferred period. How long you wait before payments start, commonly four, thirteen, twenty-six or fifty-two weeks. A longer wait costs less. The question is how long you could genuinely last on sick pay and savings, which is a sum worth doing properly rather than guessing.

2. How long it pays. Short-term policies pay for a set period, often one, two or five years, then stop even if you are still unwell. Full-term policies keep paying until you recover, retire or the policy ends. Short-term costs less and does less, and the difference matters most in exactly the situation you are insuring against.

3. The definition of incapacity. The single most important wording in the policy.

• Own occupation considers whether you can do your own job. The clearest and generally the strongest.
• Suited occupation considers whether you could do a job suited to your training and experience.
• Any occupation considers whether you could do any job at all, which is a much harder test to meet.

4. Whether the benefit increases. Cover can stay level or rise over time. On a claim lasting years, the difference is considerable.

I will go through all four with you. Anyone who quotes you a price without asking about them is quoting a different product.

What about sick pay and state benefits?

Employed people may receive sick pay from their employer, and Statutory Sick Pay exists, but it runs for a limited period and nobody runs a household on it. It is worth finding out exactly what your employer offers, because it varies enormously and plenty of people assume more than they have.

State benefits may be available depending on your circumstances. They are not designed to maintain your standard of living, and what you qualify for depends on factors including savings and household income.

The practical approach is to count what you would actually receive, work out the gap, and insure the gap.

Self-employed people need to read this part

If you are self-employed, you have no employer sick pay. None. If you are ill for a month, you are not earning for a month. The NHS provides treatment; it doesn't replace your income. A well-structured income protection policy, own-occupation, with a short deferred period, could be the most suitable cover for self-employed people.

(Wording above is already live and approved by HLP, unchanged.)

If you trade through a limited company, there may be a route to arranging this through the business rather than personally. See executive income protection. How you draw income affects which is likely to suit, and the self-employed mortgages page covers the income side if a mortgage is also on your mind.

Applying honestly

Insurers ask about your health, your medical history, your occupation and your pastimes. Occupation matters more here than with most cover, because the risk of being unable to do your particular job is the thing being insured.

Declare everything, including conditions you consider minor and anything you have seen a doctor about. A policy that pays is worth more than a policy that is cheap, and non-disclosure is the most common reason claims come unstuck.

Where this sits with your other cover

Income protection replaces income while you are alive and unable to work. It does not pay a lump sum on a serious diagnosis, which is critical illness cover, and it does not pay out on death, which is life insurance.

Plenty of households hold a lump-sum policy and an income policy doing different jobs. If budget forces a choice, the right answer depends on your circumstances, and it is worth twenty minutes rather than a guess.