Income protection insurance is a type of insurance that pays out if you’re hurt or sick and can’t work.
In the U.S. income protection insurance is more commonly called disability insurance, but it’s essentially the same idea as the income protection insurance you’ll find in the U.K., Australia, and New Zealand.
It’s a simple concept: You buy a policy based on the income you’re earning in your current role and career, and then if you can no longer work, you can file a claim and receive payments that help replace your lost income.
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What is income protection insurance?
While you’ll find a product called income protection insurance abroad, in the U.S., income protection insurance is typically sold as disability insurance.
It serves the same function though — it’s insurance that protects your income in case you can’t work because of an illness or injury.
Once you file a claim and start receiving benefits (meaning payments), you can spend them just like you would your regular income, on mortgage payments, utilities, groceries, childcare, and more.
Disability insurance vs. critical illness insurance
Disability insurance is like critical illness insurance, which is another kind of income protection coverage. Critical illness insurance covers part of your income if you’re sick and can’t work, but it only pays out for certain illnesses — like cancer, organ damage, and heart disease.
While critical illness insurance is a type of income protection insurance, it offers a lot less coverage than disability insurance. Disability benefits last longer and usually pay out more, and disability insurance covers a wider range of illnesses and injury than a critical illness policy.
What does income protection insurance cover?
Income protection or disability insurance covers a wide range of illnesses or injuries that could keep you from working, including:
Anxiety and depression
Broken bones or spinal cord injuries
Muscle spasms
Chronic fatigue
Cancer
Complications from pregnancy or childbirth
There are a few exclusions (meaning disabling events that aren’t covered), including self-inflicted, intentional injuries or any injuries you got while doing something illegal.
Income protection also won’t cover any pre-existing conditions, although you may still be able to get a policy even with certain health issues.
What kind of income protection should you get?
The best kind of income protection is a long-term own-occupation disability insurance policy. Long-term disability insurance coverage pays out if you’re unable to work for a year or longer, and you can even get a policy that protects your income through retirement age, meaning you’ll keep receiving benefits even if you can never go back to work.
Own-occupation coverage means that you can collect benefits even if you can still work, as long as you’re unable to do the job you had when you bought the policy.
Let’s say that you’re a surgeon and a hand injury keeps you from being able to operate. With an own-occupation policy, you can still receive benefits even if you can go back to work in a lower-paying job.
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Who needs income protection insurance?
You should consider protecting your income with disability insurance if you have a high-paying, specialized job like doctor, dentist, or lawyer. Working in these fields requires a high level of education and on-the-job training and special skills that even a small injury — like a broken finger — could endanger.
It’s also worth protecting your income if you have any dependents who rely on your paycheck to cover household expenses. If you can’t work, your family can continue making ends meet with your disability insurance benefits.
On the other hand, it’s not worth buying disability insurance if you won’t be able to keep up with your premiums. If your coverage lapses, you wouldn’t receive any benefits if you were hurt or injured and couldn’t work.
→ Read more about who needs disability insurance
Income protection for self-employed people
You don’t need to work a conventional job to protect your income. Disability insurance companies offer coverage to self-employed people, including people that own their own businesses.
When you apply for disability coverage, you’ll have to show proof of the income you earn from a self-employed job, like freelance contracts or tax returns. It’s harder to get coverage if you’re not making any money yet, so if you’re thinking about becoming self-employed, consider getting disability insurance before you make the change.
What does income protection insurance cost?
In general, income protection insurance costs between 1% and 3% of your annual salary. The higher your salary, the higher your premiums will be, because there’s more to protect.
The exact cost of your policy will also depend on lots of factors unique to you like, your health, age, job, hobbies, and your policy’s elimination period and benefits period — that’s the amount of time after an accident or illness that you have to wait before you can receive benefits, and the maximum length of time you can receive benefits.
Where can you get income protection insurance?
There are a few ways to get income protection insurance, and you may even need multiple policies.
Private disability insurance: This is disability insurance that you buy on your own from a disability insurance company. You have full control over your policy’s details, like benefit period and elimination period.
Disability insurance through work: You may get group disability insurance through your employer, usually for free or at a discount. This type of coverage is worth having, but you shouldn’t rely on it alone. It’s usually short-term coverage and any benefits can be taxed.
Social Security Disability Insurance: You may qualify for Social Security Disability benefits through the government. Coverage is free, but qualifying is difficult. SSDI benefits are also much lower than any other disability benefits.
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Frequently asked questions
Are disability insurance and income protection insurance the same?
Yes, in the United States, income protection insurance is called disability insurance. It’s basically the same concept as the income protection sold in the U.K. and Australia.
Is life insurance a kind of income protection?
Yes, life insurance is another way to protect your income. While disability insurance protects your income if you’re sick or injured and can’t work, life insurance covers your income if you die and can no longer provide for your loved ones.
What is final expense insurance?
Final expense insurance is a limited kind of income protection. It just covers end-of-life services, like burial and funeral costs. Final expense insurance doesn’t expire, but it can be an expensive form of protection.
