Income Protection vs Sick Pay: Covering Lost Earnings
Income protection replaces part of your earnings if illness or injury prevents you working. It pays monthly rather than as a lump sum, and continues until you return to work, the policy term ends, or you reach a defined age.
It is frequently confused with critical illness cover, which pays a lump sum on diagnosis of specific listed conditions. The two do different jobs, and for most households income protection addresses the more likely risk.
Why it covers more situations
Critical illness pays only on the listed conditions meeting the policy definitions. Income protection generally pays on any illness or injury that prevents you working, subject to the definition of incapacity.
The most common causes of long-term absence in most workforces are musculoskeletal problems and mental health conditions. Neither typically triggers a critical illness payout, and both are commonly covered by income protection.
The definition of incapacity
This is the most important term in the policy and varies substantially.
Own occupation pays if you cannot do your own job. This is the strongest definition and what you should look for.
Suited occupation pays only if you cannot do your own job or any other suited to your training and experience — weaker, and it gives the insurer more room to decline.
Activities of daily living is the weakest, paying only if you cannot perform basic functions. Policies using it will not pay in many situations where you genuinely cannot work.
Deferred period
The waiting period before payments begin, commonly four, thirteen, twenty-six or fifty-two weeks. Longer deferred periods cost less.
Set it to match your sick pay and savings. If your employer pays full salary for three months, a thirteen-week deferred period avoids paying for cover you do not need.
Check the sick pay arrangement in writing rather than assuming, since contractual sick pay varies considerably and statutory minimums are usually modest.
How much cover
Policies typically cap benefit at a percentage of gross earnings — commonly around sixty percent — because full replacement would remove the incentive to return to work.
The benefit is often paid without income tax where premiums were paid from taxed income, which narrows the gap. Confirm the treatment in your jurisdiction.
Do not over-insure: the insurer will not pay more than the capped percentage regardless of what you have been paying for.
Practical points
Guaranteed premiums cost more initially and cannot be increased; reviewable premiums start cheaper and can rise substantially.
Disclose medical history fully. Non-disclosure is the main reason claims fail.
Self-employed people have no sick pay at all, which makes this cover considerably more important for them and is precisely the group least likely to hold it.
This article is general information and not financial or medical advice.
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