How to calculate the level of income protection that would provide you with financial security

Income protection could provide you with an essential safety net if you’re unable to work due to an accident or illness. Yet, research suggests it’s a valuable step that some people might be overlooking.

If you’re too ill to work, income protection could provide you with a regular replacement income. Usually, income protection would pay out a proportion of your usual salary, such as 60%. It may allow you to continue meeting essential outgoings and focus on your recovery.

It can be easy to think that you wouldn’t need to rely on income protection. But statistics paint a different picture. According to the Office for National Statistics, the number of people reporting they are long-term sick reached a historic high at the end of 2023 – around 2.8 million people aren’t working for health reasons.

Poor health or an accident could affect you at any age, so considering how you’d cope financially may be useful.

Without financial protection, you may be reliant on Statutory Sick Pay (SSP). However, a survey from The Exeter found that almost 1 in 3 UK workers overestimate SSP, so it might not provide the financial security you expect. In 2023/24, SSP is £109.40 a week for up to 28 weeks.

Yet, the same report found that just 11% of women and 16% of men have taken out income protection.

Figures from the Association of British Insurers highlight how useful income protection could be. In 2022, more than 15,900 people claimed income protection and collectively received £231 million – a 22% increase when compared to the previous year.

So, income protection could create a safety net when you need it most. Read on to find out what you may want to consider when deciding what level of income protection could provide you with financial security.

What are your regular essential outgoings?

When you’re assessing what level of financial protection is right for you, you may want to start by looking at your outgoings. This could help you identify the potential shortfall you’d face if your income unexpectedly stopped.

As income protection typically pays a percentage of your usual income, understanding how much of your regular expenses are essential could be useful. These outgoings might include mortgage repayments, utility bills, and grocery shopping.

You may also want to include non-essential outgoings that you wouldn’t want to cut back if possible, such as private school fees for your children or club memberships.

With a clear picture of your monthly spending, you can start to see what payout you’d need from income protection to create financial security.

2 potential income sources you may want to factor into your calculations

When weighing up the level of cover you’d want income protection to provide, you might want to factor in other steps or income sources as well, including these two.

1. Emergency fund

Having an emergency fund can provide financial peace of mind. It’s often recommended that you have three to six months of essential outgoings held in an easy access savings account to cover emergencies.

As well as being useful when your boiler or car needs repairing, you could use an emergency fund to cover expenses in the short term if you’re unable to work. However, an emergency fund might not create long-term financial security alone – what would happen if you couldn’t return to work for a year?

Yet, it can supplement income protection. For example, you might be able to choose a lower level of cover if you’d also access your savings.

When you take out income protection, you’ll usually select a deferred period – this is the waiting time between the first day you’re unable to work and when you’re eligible to receive income protection payments. Typically, the longer the deferred period, the lower the cost of maintaining the financial protection will be.

So, if you know you have enough in your emergency fund to cover three months of expenses, you may opt to choose a deferred period of 12 weeks to reflect this.

2. Sick pay from your employer

When you’re assessing how you’d cope financially if you couldn’t work, reviewing your employer’s sick pay policy may be useful. If your employer would continue to pay you a regular salary, it could put your mind at ease.

However, research by The Exeter found that 19% of UK workers are not entitled to any employer sick pay. What’s more, almost half would receive support for no longer than three months.

Income protection could help you fill this potential gap. Again, your employer’s sick pay policy might affect the level of income you’d need income protection to provide and the deferred period.

Calculating if income protection is appropriate for you

If you may struggle to maintain regular expenses without your salary, income protection could provide peace of mind and an essential safety net if you’re unable to work due to an accident or illness.

Assessing the other steps you’ve taken to improve your financial resilience, such as building an emergency fund, may help you identify the gap income protection could fill and choose the right option for you.

Contact us to talk about how you could create long-term financial security

Taking out appropriate income protection is just one way you could create long-term financial security. We can work with you to create a comprehensive financial plan that aims to offer you peace of mind, even when the unexpected happens.

Please contact us to arrange a meeting to talk about how you could improve your financial resilience.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Note that financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.