Income protection is a policy that will pay out a tax-free monthly lump sum at a percentage of your annual income if you are unable to work due to sickness, injury or unemployment. You can protect up to 60% of your gross annual salary.
Income protection will pay out for the benefit term specified at the start of your policy. Policies are tailored to suit your individual needs and payment periods are either short term – designed to payout for a set period of time usually 12 or 24 months – long term for the full duration of your policy, or if you are able to return to work.
Deferred periods are the time you will have to be out of work before your income protection will start to pay out, usually between 4 and 52 weeks.
Jonny works as a school teacher, he had taken out a full term income protection plan at age 25 to cover him until retirement age. At age 30 Jonny was involved in a serious car accident and will never be able to return to teaching, His annual income was £27,000 – Jonny will now receive £16,200 (60%) of his income tax free every year for the next 35 years until his policy runs out.