Does income protection affect state benefits?

They say money can’t buy you happiness - and it’s true that the best things in life are free. That being said, financial stability is pretty important! That’s why the government offers a little help to those who need it in the form of state benefits. It’s also why insurance products such as income protection exist. 

So, how do income protection and state benefits impact each other? Unfortunately, there isn’t really a straightforward answer here - but we’ll try and shed a little light and clarity on their relationship.

Firstly, let’s talk a little more about income protection

With one million workers in the UK finding themselves unable to work each year due to a serious illness or injury [1], income protection is a well worth consideration for anyone with an income. Income protection does what it says on the tin - it protects your income. It provides you with regular tax-free payments to replace a percentage of your earnings (usually between 50-70%) should you become seriously ill or injured and can no longer work. 

The policy pays out after a pre-agreed period of time called the ‘deferral’ period. It could be as short as four weeks or as long as 12 months after you make a claim - you decide when taking out your policy. The longer the deferral period, the lower your premiums.

Ok, so how does it impact state benefits?

The relationship between income protection and state benefits is not always clear. This is because a lot of the time, it depends on the insurer's specific detail and stance on the subject. If you claim state benefits and also need to claim on your income protection policy, some insurers take your benefits into account, along with things such as Statutory Sick Pay (SSP), which may impact whether you qualify for the full income protection payments. Other insurers won’t take benefits into account, and full income protection payments can be granted.

However, it’s not always as straightforward as that. It can also depend on how much cover an individual has taken out. If it is below the maximum percentage of a salary they offer, it may not impact the payout. However on the other hand, some insurers may well decrease the income protection payout depending on which benefits the policyholder is receiving. 

With state benefits always evolving and changing, these stances are likely to change further over the years to come - particularly with Universal Credit in mind. For now, there are not any concrete guidelines around income protection and state benefits. Always speak to your insurance provider to become completely clear on their stance when you take out your policy, or if you begin claiming state benefits at any point after taking out your policy.

Do I actually need income protection if I can claim state benefits?

Of course, not everyone needs income protection, but there are very few people who wouldn’t really benefit from it. As mentioned before, it can replace around 50-70% of your regular income. This is possibly more than state benefits can offer the majority of people. 

That being said, you may be okay living on SSP or government benefits should you become too ill or injured to work. Perhaps you have some savings or can get help from friends and family. If this is the case, income protection may not be a priority for you. If you can afford the monthly premiums though, it’s definitely an insurance product that is worth any working person having under their belt.

References

[1] https://www.abi.org.uk/globalassets/sitecore/files/documents/publications/public/2014/protection/welfare-reform-for-the-21st-century.pdf