If you are signed off work due to falling ill or cannot work due to an injury, income protection insurance offers a financial safety net and helps you keep up with monthly payments by replacing a portion of your income.

This article explores how income protection can help you stay on top of your mortgage repayments during those difficult times. It’s especially useful for first-time buyers, homeowners with mortgages, and anyone who depends on their job to cover their monthly housing costs.

What is Income Protection Insurance?

Income protection insurance is designed to pay you a regular monthly income if you’re unable to work due to serious illness or injury. This income cover helps you meet your financial commitments, like your mortgage, rent, utility bills, or everyday living costs, via monthly pay outs.

Unlike mortgage payment protection insurance (MPPI), which is typically limited to covering your mortgage repayments, income protection offers broader support. The money you receive isn’t tied to a specific bill. You can use it however you need to.

Whether you’re employed or self-employed, income protection can provide peace of mind by giving you a financial safety net when unexpected health challenges keep you from working.

How Does Income Protection Insurance Help With Your Mortgage?

Most income protection policies usually cover from around 60% to 70% of your annual salary. These payments can be used however you need, whether it’s keeping up with your monthly mortgage, covering utility bills, or paying for everyday essentials.

You need to meet some requirements to be eligible for income protection cover in the UK. These include:

• Employment status: You need to be employed or self-employed.
• Minimum income: Some policies may require a minimum level of income to qualify.
• Medical history: Some policies exclude pre-existing medical conditions
• Lifestyle disclosures: You’ll need to disclose lifestyle factors such as smoker status, alcohol use, or high-risk hobbies.
• Age restrictions: Many providers set age limits for when a policy can start and when it ends.

In addition to these, most policies include a waiting period, also called a deferred period. This is the time between when you stop working and when your pay out begins. Waiting periods typically range from four weeks to six months, and choosing a longer one might reduce your monthly premium and is a good option if your employer already provides some cover.

Pros and Cons of Income Protection Insurance for Mortgage Holders

Income protection payments are a valuable safety net for homeowners. However, like any insurance product, it’s important to weigh the advantages and the potential drawbacks. Here’s a closer look at its pros and cons.

Benefits of income protection insurance

• Covers a wide range of illnesses and injuries

Most policies cover both physical and mental health conditions, from back injuries to depression, making it suitable for different health situations.

• Provides peace of mind during financial uncertainty

The assurance that you’ll still receive income if something happens can ease stress. This makes it easier to focus on recovery without bills piling up.

• Flexible use of funds (not limited to mortgage payments)

The payouts aren’t tied to your mortgage. You can spend them on whatever you need. This could include childcare costs, household bills, or groceries.

Possible drawbacks of income protection insurance

• Premiums can be higher than mortgage payment protection insurance

Because it covers more and pays out over a longer period, it tends to cost more. This makes it a bigger monthly commitment compared to basic mortgage cover.

• Longer waiting periods before payout starts

Most income protection plans won’t start paying right away. There’s usually a deferred period of four weeks to six months. You’ll need to rely on savings, existing employer cover or emergency funds to cover expenses during this time.

• Complexities around exclusions (e.g., pre-existing conditions)

Some policies don’t cover existing health conditions or may charge extra costs to include them. It’s important to read the fine print and be honest during the application process.

How to Choose the Right Income Protection Policy

Choosing the right cover means finding a policy that matches your personal needs and financial situation. Here are some key things to consider when comparing policies:

• Cover level/monthly benefit: This is the percentage of your income the policy will pay out. Most policies offer between 60% and 70% of your gross earnings.
• Benefit period: This is how long the insurer will continue to pay out. Some policies cover up to a year, while others pay until retirement age.
• Type of cover: Policies may differ based on how they define your ability to work.
  • Own occupation: Covers you if you can’t do your specific job.
  • Suited occupation: Covers you if you can’t do a job suited to your skills or experience.
  • Any occupation: Only pays if you can’t work in any job at all. This is usually the strictest form of cover.

It’s also worth speaking with a broker who can help you compare income protection insurance. At Flagstone, we offer independent advice and help you find a policy that fits your situation. Learn more about our income protection services.

Speak to a Flagstone Advisor About Protecting Your Mortgage

At Flagstone, we provide independent, whole-of-market advice to help you find the best income protection policy for your needs. Our advisors are not tied to any single insurer, so you get access to a wide range of options.

We offer no-obligation consultations tailored to your personal and financial situation. Whether you’re employed, self-employed, or have specific needs, we’ll help you explore your options.

Get in touch today to speak with an advisor and start protecting your mortgage with the right cover.

FAQs

What other types of insurance should I consider for comprehensive cover?

You might want to look at:

• Critical illness cover pays a lump sum if you’re diagnosed with a serious condition.
• Life insurance policies support your loved ones if you pass away.

Do insurers consider my family’s medical history when I apply for income protection insurance?

Yes. Insurers can consider your family’s medical history when assessing your income protection application, although your own medical history usually has a bigger influence.

How does income protection insurance work?

You choose the waiting period and how long you want the payments to last (e.g., one year, two years, or until retirement).

The monthly payouts are usually tax-free if you pay for the policy yourself using your taxed income. However, the monthly benefit may be taxed if your employer provides the cover.