Income protection insurance is a policy designed to provide you with income if you are unable to work due to sickness or injury. Generally you will pay a proportion of your salary as a premium, and if you become unable to work then the insurance company will make payments to you to cover your living expenses.

Income protection insurance premiums will either represent a proportion of your salary or be a fixed amount, and they can either be stepped or level. Stepped premiums start off quite low, and they increase every year. They are often more attractive to those who are more concerned with cash flow. Level premiums will start off higher than a stepped policy, but they won’t increase every year. Over the long term, if no claims are ever made, a level premium will represent a lower premium.

Payouts from an income protection insurance policy will depend on whether the policy was set up as agreed value or indemnity value. With agreed value, the amount you will be paid is based on a fixed amount agreed to by you and your insurer. If you become permanently incapacitated you will receive a payout to that amount. With indemnity value income protection policies you will be paid a proportion of your income in the event that a payout is made. You will have to submit financial documents to the insurer and your premiums will be tied to your income.

People with family commitments are the biggest purchasers of income protection policies, as they want to be able to protect the lifestyle of themselves and their family in the event of them becoming permanently disabled. Young people should consider their current lifestyle and how that would be affected if they were unable to earn an income.