Income Protection Insurance: How It Works and What to Choose

Income protection insurance is a policy that pays you a regular monthly income if you cannot work because of illness or injury. It starts after an agreed waiting period and keeps paying until you go back to work, the claim period ends or the policy finishes. It protects the income that pays for everything else.

Most of us could cope with a week or two off sick. Far fewer could cope with six months, or a year, on Statutory Sick Pay. Yet a bad back, an operation or a period of poor mental health can keep people off work for much longer than they expect.

Income protection is often the cover people think about last, even though time off sick is a common reason for income to stop. This guide explains how it works, what the state would give you instead and how to choose a policy that will actually pay. For the full picture of life cover, critical illness and business cover, see our UK protection insurance guide.

What is income protection insurance and how does it pay out?

You choose a monthly benefit when you take out the policy. If you are signed off work because of illness or injury, and you have been off for longer than your chosen waiting period, the insurer pays that monthly amount. Payments continue while you remain unable to work, up to the limits of your policy.

MoneyHelper says income protection “typically pays out between 50% and 65% of your income if you’re unable to work” (MoneyHelper). Insurers cap the benefit below your full earnings so there is still a reason to return to work when you are able.

Unlike critical illness cover, income protection is not limited to a list of conditions. It can cover most illnesses and injuries that stop you working, including mental health conditions and back problems, subject to the policy terms and any exclusions based on your history. Benefits from a personal policy you pay for yourself are normally tax free.

What would you get from sick pay and the state?

This is the starting point for working out how much cover you need. In the 2026 to 2027 tax year:

Support	What you get	Source
Statutory Sick Pay	The lower of £123.25 a week or 80% of your normal weekly earnings, for up to 28 weeks. Paid from the first day of sickness since 6 April 2026	GOV.UK
New Style Employment and Support Allowance	£95.55 a week in the assessment phase if you are 25 or over, and £145.90 a week in the support group	GOV.UK
Universal Credit standard allowance	£424.90 a month for a single person aged 25 or over, £666.97 a month for a couple	GOV.UK

Statutory Sick Pay of £123.25 a week works out at roughly £534 a month. Universal Credit depends on your household income and savings, so a partner’s earnings can reduce it or remove it altogether. Some employers pay full salary for a period, but many pay only Statutory Sick Pay, and if you are self-employed you get no sick pay at all.

Check your contract or staff handbook to see exactly what your employer pays and for how long. That one detail shapes the whole policy.

What is a deferred period?

The deferred period, also called the waiting period, is how long you must be off work before the policy starts paying. MoneyHelper lists the most common options as 4, 13 and 26 weeks and a year. The longer the wait, the lower the premium.

The aim is to match the deferred period to when your other money runs out:

Your situation	A deferred period to consider
Self-employed with little in savings	4 weeks
Employer pays full pay for 3 months	13 weeks
Employer pays full pay for 6 months	26 weeks
Strong savings or a long employer sick pay scheme	52 weeks

Remember that payments usually start after the deferred period ends and are then paid monthly in arrears, so allow a little extra breathing room in your savings.

What are own, suited and any occupation definitions?

The definition of incapacity decides when the insurer considers you unable to work. It is the single most important choice in an income protection policy.

Definition	Pays out if	What MoneyHelper says
Own occupation	You cannot do your own job	Usually the most expensive, but claims are more likely to succeed
Suited occupation	You cannot do your own job or a similar one that suits your qualifications and experience	A middle ground
Any occupation	You are too ill to do any kind of work	Usually the cheapest, but with a higher risk of not paying out

Own occupation is the strongest. A surgeon with a hand injury, or an electrician with a back injury, might be able to do some other kind of work but not their own. With own occupation cover, the claim can still pay. Some insurers only offer own occupation for certain jobs, and higher-risk manual work may be limited to suited or any occupation.

Should you choose a short-term or long-term income protection plan?

	Short-term plans	Long-term plans
How long each claim pays	Usually one, two or five years per claim	Can pay until you return to work, retire or the policy ends
Cost	Lower premiums	Higher premiums
Strength of cover	Good for most periods off work	Covers serious long-term illness
Suits	Tighter budgets, or people who want to protect a shorter spell	People who rely on their income until retirement

A short-term plan covers many common periods off work, and it can be a sensible way to get meaningful cover on a budget. The risk is a long illness. If you are still unable to work when the claim period ends, the payments stop. A long-term plan protects against that, which is why it is the stronger option where it is affordable.

Who is income protection insurance right for?

It suits:

• the self-employed and contractors, who have no employer sick pay
• employees whose employer pays only Statutory Sick Pay or a short period of full pay
• homeowners whose mortgage depends on one or both incomes
• single people with no partner’s income to fall back on
• company directors who pay themselves mainly through dividends.

It may be less of a priority if you have a long, generous employer sick pay scheme and a group income protection benefit, or savings that could cover a long period off work. Even then, employer benefits usually end when you leave the job, so it is worth checking what happens if you move.

How does income protection work for the self-employed and company directors?

For the self-employed, income protection is often the most important cover of all. There is no employer to pay you while you recover, and your bills do not stop because your business does.

The key issue is proving your income. Insurers base the maximum benefit on your earnings, and they will check them when you claim. The way they look at income varies:

You are	What insurers usually look at
Self-employed sole trader	Your share of profit before tax, usually from your recent tax calculations or accounts
Partner in a partnership	Your share of the partnership profit
Limited company director	Your salary and dividends, and with some insurers your share of profits kept in the company

Directors often pay themselves a small salary and take the rest as dividends. If a policy only counts salary, the benefit could be far too low. Some insurers take dividends and retained profit into account, so the choice of insurer matters a great deal. Keep your accounts and tax records up to date, as you will need them to support a claim.

Some directors arrange income protection through their limited company instead. The tax position of company-paid cover is different, so speak to your accountant before deciding. If you are self-employed and buying or remortgaging, see our self-employed mortgage advice and company director mortgage guide.

What affects the cost of income protection insurance?

• Your job. This matters more for income protection than for any other cover. Office-based work usually costs less than manual work.
• Your age when you start.
• Your health and medical history, including back problems and mental health.
• Smoking and vaping.
• The monthly benefit. More cover costs more.
• The deferred period. A longer wait means a lower premium.
• Short-term or long-term. Long-term plans cost more.
• The occupation definition. Own occupation usually costs the most.
• Guaranteed or reviewable premiums, and whether the benefit rises with inflation.

If the cost of full cover feels high, it is usually better to adjust the deferred period or the benefit than to switch to a weaker definition without understanding what you are giving up.

Do income protection claims get paid?

The ABI reports that 79% of income protection claims were paid in 2025, a figure that covers individual and group policies combined (ABI, June 2026). Insurer figures for individual policies can look different. Aviva, for example, reported that it accepted 90% of income protection claims on individual policies in 2025 (Aviva).

Claims can fall down when the person does not meet the policy’s definition of incapacity, when information was missing from the application, or when the income declared cannot be supported by records. Choosing a strong definition, answering the application questions fully and keeping your income records in order all help.

How does income protection compare with the alternatives?

Cover	What it does	Main limitation
Income protection	Monthly income for most illnesses and injuries that stop you working	Does not pay out on death
Critical illness cover	Lump sum on diagnosis of a listed serious illness	Only covers conditions on its list that meet the definition
Mortgage payment protection	Covers the mortgage payment for a limited period	Usually short-term and narrower
Savings	Instantly available	Can run out quickly in a long illness

Income protection and critical illness cover work well together. One replaces your monthly pay, the other gives you a lump sum to clear debts or adapt to a serious illness. If your family depends on you, life cover such as family income benefit protects them if the worst happens.

Is income protection written in trust?

Usually not. Income protection pays you while you are alive, so the benefit comes directly to you rather than to beneficiaries. Trusts are mainly used for life insurance, where they help a payout reach your family quickly and outside your estate.

What are the most common income protection mistakes?

1. Assuming your employer will look after you. Many pay only Statutory Sick Pay.
2. Choosing the shortest deferred period by default. It can cost far more than you need if your employer pays full salary for months.
3. Picking the cheapest definition. Any occupation cover may not pay if you could do some other job.
4. Insuring salary only as a director. Dividends may be left out entirely.
5. Not keeping income records. You will need them to support a claim.
6. Never reviewing the benefit. A pay rise or a bigger mortgage can leave your cover too low.

How Option Finance helps with income protection insurance

We are mortgage and protection advisers, so we can match your income protection to the mortgage payment it needs to cover. We will:

• work out your real gap, starting from what your employer and the state would pay
• recommend a deferred period that fits your sick pay and savings
• compare policies from leading UK insurers on definitions, claim periods and how they assess income
• explain how insurers treat salary, dividends and retained profit if you are a director
• help you complete the application accurately
• review your cover when your income, job or mortgage changes.

How we are paid. There is no fee for our protection advice. We are paid by commission from the insurer you choose. If we are arranging your mortgage, protection advice is included at no extra cost.

Frequently asked questions

Speak to Option Finance about income protection insurance

Tell us what you earn, what your employer pays when you are off sick and what your bills look like. We will show you the gap and how to fill it at a cost that works, with no obligation to go ahead.

Book a free initial consultation using the enquiry form below. See also our UK protection insurance guide, critical illness cover guide, relevant life cover guide and mortgage guide.