We insure the wrong thing

Ask most people what protection they have and they will say life insurance. It came with the mortgage. It was arranged in twenty minutes by someone who was mainly arranging something else.

Then ask what they would actually claim on first, and the honest answer is almost never that.

We are, as a country, well insured against the thing that probably will not happen and badly insured against the thing that quite possibly will.

The mismatch

During your working life, you are considerably more likely to be unable to work for an extended period than you are to die.

That is not a marketing line, it is just what the numbers look like. Illness and injury take people out of work for months at a time constantly, at every age, and most of those people recover and return. Very few of them die.

And yet life cover is everywhere and income protection is not. Life cover is sold with mortgages, it is cheap, it is easy to understand and it takes ten minutes to underwrite. Income protection costs more, asks harder questions, takes longer to arrange, and nobody brings it up when you are buying a house.

So the risk that is most likely to happen is the one people are least likely to be covered for.

What actually happens if you stop earning

Most people have never worked this out, and it takes about five minutes.

What comes in? Employer sick pay, and for how long. This is the number almost nobody can answer, and it varies enormously. Some employers pay nothing beyond statutory. Others, particularly larger organisations and the public sector, pay several months at full pay and several more at half.

If you work in the NHS, teaching or local government, you may have far better sick pay than you realise, and it changes what you need to buy. If you work for a small private employer, you may have almost nothing after a fortnight.

Then what? Statutory sick pay, at a flat weekly rate that is a small fraction of most people's earnings, for a limited period. After that, means-tested support that takes your savings and your partner's income into account.

The state safety net stops people becoming destitute. It does not maintain a mortgage, a car and a family's standard of living.

And what goes out? Your essential monthly spending. Not your full lifestyle. Housing, bills, food, transport, childcare, insurance, minimum debt payments.

The gap between those two figures, and how many months your savings would cover it, is your entire protection question. Everything else is product detail.

What income protection actually does

It pays you a monthly income if illness or injury stops you working, and it keeps paying until you recover, retire, or the policy ends.

Three things decide whether a policy is any good, and only one of them is the premium.

The definition of incapacity. "Own occupation" pays if you cannot do your own job. That is the definition you want. A surgeon who develops a hand tremor cannot be a surgeon, and an own-occupation policy pays even though they could clearly do other work. Weaker definitions ask whether you could do a job suited to your experience, or in the worst case any job at all, and the difference between them is the difference between a policy that responds and a policy that argues.

How long it pays. Full-term policies pay until you recover or reach the end date, usually your intended retirement age. Short-term policies pay for a year or two per claim and then stop, even if you are still ill. Short-term is much cheaper and it covers the common scenario. It does not cover the scenario that would actually ruin you.

Plenty of people have short-term cover and believe they have the other kind.

The deferred period. How long you wait before it starts paying. Match this to when your employer sick pay ends. Someone with six months at full pay who buys a policy paying from week four is paying a much higher premium for cover they cannot use.

Getting that one right is often the difference between "too expensive" and affordable.

Why people don't buy it

It costs more than life cover, which is true and is because claims are more likely. That is not a flaw in the pricing, it is the entire point.

"I'd be fine, I've got savings." Possibly, for a few months. Income protection is not for the broken arm that keeps you off for six weeks. It is for the back injury, the cancer diagnosis, the mental health crisis that takes eighteen months.

"They never pay out." They overwhelmingly do. Industry claims statistics consistently show the large majority of protection claims paid, and the failures cluster around one cause, which is non-disclosure at application. Which brings us to the only genuinely important instruction in this whole article.

Tell them everything

When you apply, you answer questions about your health, your family history, your job and your lifestyle. The insurer prices the policy on those answers.

If a claim later reveals you left something out, the insurer can reduce or decline it.

The cases that go wrong are almost never someone hiding a serious diagnosis. They are people who forgot a consultation six years ago, or decided a symptom was not worth mentioning because nothing came of it, or did not think family history counted because they are healthy themselves, or rounded down how much they drink.

Disclose everything, including the things you are sure are irrelevant. The worst realistic outcome is a slightly higher premium or an exclusion. That is enormously better than a declined claim in the worst year of your life.

If you are not sure what is on your medical record, you can ask your GP for a copy. You are entitled to it and it removes the guesswork.

The honest complications

Life cover still matters. If you have children or a partner who could not manage the mortgage alone, life cover is urgent and it is cheap. This is not an argument for cancelling anything. It is an argument for noticing what is missing next to it.

Some people genuinely do not need income protection. Someone with a long period of full employer sick pay, substantial savings, and a partner earning enough to cover the household has already got a version of it. That is a legitimate position, arrived at by doing the arithmetic rather than by not thinking about it.

It is more expensive than the alternatives, the underwriting is more involved, and the details genuinely determine whether you are covered. It is not a product to buy on price from a comparison table.

And it gets harder to buy as you go. Protection is priced on age and health, and both move in one direction. The cover you can arrange easily at 35 may be expensive or unavailable at 50, and a diagnosis in between can close the door for good. This is the one area of financial planning where waiting has a hard, measurable cost.

What to do this week

Send one email to HR with three questions. What is my sick pay entitlement, how long at full pay and how long at half? What is my death in service cover? Do we have group income protection?

Then work out your essential monthly outgoings, and how many months your savings would cover them.

Those two numbers give you the answer. You may find you are better covered than you thought, which is a good outcome and costs you nothing to discover. Or you may find that the thing most likely to happen to you is the thing you have made no provision for at all.

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This article is for general information and is not personal advice or a recommendation of any product. Policy terms vary substantially between insurers and the definitions determine whether a claim succeeds.

If you would like to talk any of this through, get in touch.