How much income protection do you need? [5 key costs to consider]

Income protection is an insurance policy that can replace lost earnings while you’re unable to work due to illness or injury, meaning you won’t need to make substantial cutbacks to your lifestyle, and you won’t have to rely on others financially.

This type of insurance policy has gained increasing interest since the start of the Coronavirus pandemic. In a 2021 survey 52% of respondents said that the pandemic had influenced their decision to take out income protection (Insurance Business Magazine).

But one common question is how much income protection do you need and how can you work out how much cover you’re likely to require?

Below we shed some light on the topic and provide a few key financial commitments that you may want to consider when working out how much cover you need.

How can you calculate how much cover you need?

Unlike other forms of cover, such as life insurance, with income protection insurance you won’t be able to select the exact amount that you require.

This is because the amount paid out to you will be a percentage of your usual annual income (paid out on a monthly basis). Typically, the maximum percentage paid out is 70%, but this can vary between providers.

Example:

If your yearly income was 50,000 and you have a policy that pays out 60% of your income over 12 months you could receive 2,500 each month (totalling 30,000 over the lifetime of your policy).

However, it’s still beneficial to be aware of exactly how much cover you need to cover all of your essential expenses.

This will help you to better budget your payments when the time comes and, if the amount you receive each month doesn’t quite cover all costs, you know to make provisions to cover the remainder (this could be setting
aside a small amount in savings each month or taking out additional cover).

Calculating how much cover you require can be as simple as adding up the sum of all of your financial commitments.

As calculating large sums of money can get confusing, thankfully, there are now also helpful calculators that you can use to input your financial commitments to quickly and easily work out how much cover you’re likely to require – like this income protection insurance calculator by Reassured.

What costs should you consider when calculating how much cover you need?

Essentially the payments you receive from an income protection policy will mimic a regular income while you’re unable work. This means it’s wise to use these payments towards whatever you would spend your usual monthly pay cheque on.

Key financial commitments you may want to consider include:

Mortgage and rental payments

Your first priority will likely be ensuring that you can keep a roof over yours and your family’s head, while you’re unable to work, without falling into financial difficulty.

Our home is the biggest expense we’ll incur in our lifetime, so it makes sense to protect it.

As an alternative to income protection, you could take out cover specifically designed to cover your mortgage payments (mortgage payment protection insurance, MPPI), which would leave your income protection payments to cover other essential living costs (such as the ones listed below).

Household bills

From gas to electricity and water, it’s no secret that household bills are on the rise. This makes it even more important to have protection in place to ensure these costs can be covered no matter what life throws at you. Additionally, unexpected repair costs for appliances, plumbing, or other household systems can be a financial burden for many. In the event your roof is damaged by a storm, you may have to contact roofing professionals (such as these roofers Greensboro) to fix the damage. Similarly, you may have to look for a plumbing firm if you face a pipe burst in your washroom. In case of such unexpected repairs, having an emergency fund or homeowners/renters insurance can help alleviate some of the financial burdens.

Leisure costs

Being unable to work can cause stress for a lot of people, so it’s important to still take time for yourself and do the things you enjoy.

Whether it’s going to the gym to improve your mental health or taking your kids to swimming lessons, these shouldn’t have to take a backseat.

Transportation costs

While you won’t need to fund your daily commute to work, being unable to work can incur other unexpected transportation costs.

If you’re unable to drive, walk or cycle like you usual would, due to an injury, you may need to spend extra on taxis or other forms public transport to get around.

You may also need to pay for addition transportation to and from doctors or hospital appointments.

Loans and debts

Failure to keep up with loans and debts, such as credit card bills or finance payments, while you’re not earning your usual income could lead to late fees or interest being added, which could make these costs more expensive for you in the long run.

Where can you buy income protection?

Income protection can be taken out directly through any provider, through comparison sites or through an FCA regulated broker.

Using a broker, you’ll have a dedicated expert on hand to talk through your needs and to walk you through each step of the application process.

You’ll also be able to compare multiple quotes from the UK’s leading providers to make sure you get the right policy at the best price.