How Much Income Protection Cover Do I Really Need?

If you are considering income protection, the key question is usually not whether you need it, but how much you actually need. The right monthly benefit should give you enough money to cover your essential outgoings if illness or injury stops you working, without paying for more cover than necessary.

This is particularly important if you are self-employed. Unlike an employee, you may not have an employer continuing to pay you while you are unable to work. For self-employed workers across Derbyshire, from builders and tradespeople to consultants and business owners, your ability to earn may be one of your biggest financial assets.

MoneyHelper's guide to income protection explains that income protection can typically replace around 50% to 65% of your income if you cannot work because of illness or an accident, depending on the policy.

How do I calculate how much income protection I need?

The simplest starting point is to work backwards from what you actually need to spend each month.

Rather than trying to insure your entire current income, make a list of your essential monthly commitments and consider what income you would need if you could no longer work.

A useful calculation is:

Essential monthly spending + financial commitments - other reliable income = approximate income protection requirement

This is only an illustration. The amount of income protection available to you will depend on your earnings, insurer and policy terms.

How much income protection do self-employed workers need?

For a self-employed person, the calculation can be even more important because there may be no company sick pay to fall back on.

MoneyHelper's guidance on personal insurance when you're self-employed highlights that self-employed people generally do not receive sick pay from an employer and therefore need to consider what would happen if illness or injury stopped them working.

Consider what would happen if you could not work for six months.

Could you still pay your mortgage? What about your van, business costs, household bills and food? Would your savings last long enough?

If the answer is no, income protection could provide an additional layer of security.

A useful test for self-employed workers:
Calculate how many months your current savings could cover your essential household spending if your income stopped tomorrow. This can help you understand the potential gap that income protection could fill.

What expenses should income protection cover?

You do not necessarily need to insure every pound you currently spend.

Start with the costs that would continue regardless of whether you were working.

These might include:

• Mortgage or rent

• Council tax and utilities

• Food

• Car finance and insurance

• Essential travel

• Loan repayments

• Childcare

• Other regular household commitments

You should also consider whether your circumstances could change. Someone with children or a large mortgage may need a different level of income protection from someone who lives alone with relatively low fixed costs.

What happens if I already have savings?

Savings can reduce the amount of income protection you need, but they should not automatically replace it.

For example, you may have £20,000 in savings. That sounds substantial, but if your household needs £2,500 every month, those savings could disappear surprisingly quickly if there is no income coming in.

There is also a difference between using savings to cover a short-term emergency and relying on them to replace an income for several years.

Savings give you immediate access to your own money.

Income protection is designed to provide a regular income following a qualifying period if you are unable to work because of illness or injury.

For many people, the two work better together rather than being treated as alternatives.

How does the deferred period affect how much cover I need?

The deferred period is the time you must be unable to work before your income protection payments begin.

Common periods include four, 13, 26 and 52 weeks. Generally, the longer you can wait before receiving a benefit, the lower the premium may be.

For example, someone with six months of accessible savings may be comfortable choosing a longer deferred period, whereas someone with very little financial buffer may need to consider a shorter one.

This is why the cheapest income protection quote is not necessarily the most suitable one.

How much does income protection cost?

There is no standard price.

Premiums can be affected by your age, occupation, health, smoking status, level of cover, deferred period and the policy definition used to assess whether you are unable to work.

For a self-employed builder, for example, the insurer may assess the occupation differently from someone who works in an office.

This is one reason getting an individual quote matters. Two people wanting £2,000 a month of income protection could receive very different premiums.

Can I get income protection if I am self-employed?

Yes. Self-employed people can take out income protection, and it can be particularly relevant because there is no employer providing traditional sick pay.

However, the insurer will need to establish your income and occupation, and the definition of incapacity can be particularly important.

For example, an own occupation policy can potentially pay when you are unable to perform your specific job, subject to the policy terms. Other definitions may require you to be unable to perform a suitable occupation or any occupation.

For someone whose work is physical, this distinction can make a significant difference.

You can also check the government's guidance on self-employed and contractor employment status to understand how self-employment differs from employment, including the lack of standard employee benefits such as sick pay.

What happens if I claim on income protection?

If you become unable to work because of illness or injury, you normally contact the insurer and make a claim.

The insurer assesses the claim against the policy terms. If it is accepted, payments begin once the deferred period has been satisfied.

The benefit can then continue while you remain eligible under the policy, potentially for a long period depending on the cover selected.

The precise definition of incapacity is therefore important. You should understand exactly what would need to happen for your policy to pay out before taking it out.

How much income protection should I have in Derbyshire?

For self-employed workers in Derbyshire, the calculation should reflect the reality of how you earn your money.

A sole trader with a mortgage and family may need substantially more protection than someone with low household commitments and significant savings.

Likewise, a tradesperson who relies entirely on their ability to work physically may want to pay particular attention to the policy's definition of incapacity.

Castle Stonebridge advises clients across Chesterfield, Sheffield and surrounding Derbyshire areas on income protection, alongside wider personal protection and financial planning. Make an enquiry here Independent Financial Advisers | Castle Stonebridge Financial Planning.

So, how much income protection do I need?

There is no universal figure.

The starting point is to work out what your household would actually need each month if your income stopped, then account for savings, other income, existing benefits and the waiting period you could realistically manage.

For a self-employed person, that exercise can highlight a significant gap between what you earn and what would still be coming in if you became ill or injured.

The next step is making sure the policy itself is suitable, including the definition of incapacity, deferred period, benefit period and exclusions.

The aim is not to insure the biggest possible amount. It is to put enough protection in place to keep your finances functioning if you cannot work.

If you are unsure how much income protection would be appropriate for your circumstances, speak to an adviser who can work through your income, expenditure and existing financial protection with you.

*Disclaimer: This article is for general information only and does not constitute personal financial advice. The suitability and cost of Protection will depend on your individual circumstances and the terms of the policy.