Short-term or long-term income protection compared

Income protection pays you a regular income if you cannot work because of illness or injury. The single biggest choice you make when you take out a policy is how long each claim pays. A short-term policy pays for a set period, often one, two or five years. A long-term policy can pay until you return to work, retire or the policy ends¹.

That choice drives the cost more than almost anything else. Choosing a policy that pays out for a set period, such as one or two years, can be cheaper than cover that runs until retirement¹. Long-term cover costs more because the insurer carries the risk for far longer, potentially decades.

Both types pay a regular income rather than a lump sum, usually covering around 50% to 70% of your salary, and the income is tax free¹. What differs is how long the money keeps coming, and what happens if your illness outlasts the payment period.

Short-term or long-term: the difference is how long each claim pays

The distinction is not about how long you keep the policy. It is about how long a single claim keeps paying once it starts.

A short-term policy, sometimes called limited term or budget cover, restricts the monthly benefit to a certain period of time, typically one, two or five years, in the event of a valid claim⁸. Some cheaper short-term policies may only pay for one or two years⁹. Once that period ends, the payments stop, even if you still cannot work.

A long-term policy, sometimes called full-term cover, provides a regular monthly payment until your policy term ends, when you return to work, or when you pass away, whichever is earliest⁸. Cover can last until your 70th birthday, or your chosen retirement age if earlier⁵. This is the type most people mean when they talk about income protection.

The gap between the two matters most in the cases where it is hardest to predict recovery. A back injury, a mental health condition or a cancer diagnosis can keep someone off work for years. A short-term policy that pays for two years leaves a hole after that. A long-term policy keeps paying, provided you still meet the insurer's definition of incapacity.

There is a middle ground. Some insurers offer a long-term claim period that pays until a chosen finishing date, or a short claim period of two or five years, so you can pick the length that fits your budget and your circumstances¹⁰.

What both types pay: 50% to 75% of your earnings, tax-free

Whichever length you choose, the payout works the same way. Income protection typically pays out a regular income rather than a lump sum, usually covering around 50% to 70% of your salary¹. Other sources put the range at about a half to two-thirds of your earnings before tax from your normal job², and some policies limit the benefit to between 50% and 75% of your earnings before you were unable to work⁴.

The income you get from the policy is tax free². That is one reason the percentage looks lower than your salary: the insurer is replacing taxed pay with untaxed benefit.

There are two rules that cap what you can get. You cannot insure yourself for an amount higher than your earnings when you take the policy out⁴. And policies do not replace all your pre-disability income: they usually provide a proportion of your income, minus state benefits and any income from similar policies¹¹.

Some insurers pay a higher percentage on the first part of your salary, such as the initial £50,000, and a lower percentage on the remainder¹¹. That structure tends to favour people on lower and middle incomes, because the first slice of salary is replaced more generously.

The benefit is normally paid monthly in arrears, starting in the month after the deferred period has expired⁴. It is a replacement for lost earnings, not a windfall, and the cap on insurable earnings is designed to keep it that way.

Costs: how the benefit period and deferred period change premiums

Two levers drive the price of income protection more than any others: how long the policy pays, and how long you wait before it starts paying.

On the benefit period, the pattern is straightforward. Choosing a policy that pays out for a set period, such as one or two years, can be cheaper than cover that runs until retirement¹. The insurer's exposure is capped, so the premium falls.

On the deferred period, the same logic applies in reverse. Generally, the longer the deferred period you choose, the cheaper your monthly premium is likely to be¹². Longer waiting periods reduce your premium, while shorter periods increase it¹³. The longer the waiting period, the more affordable the monthly premium can be¹⁴.

Other factors feed into the price too. Key factors include age, job risk, health and lifestyle, amount of cover, deferred (waiting) period, and benefit term¹³. Age and health are fixed at the point you apply; the deferred period and benefit term are the two you can trade against each other.

Premiums themselves can be structured in different ways. They can stay fixed, which means any money paid will probably also stay fixed. They might increase by a fixed amount each year, or by a variable amount linked to, for example, the Retail Price Index or National Average Earnings Index⁴. Some policies are renewable, covering a five or ten year period, after which you take out a new policy without providing any additional health information, though the premiums you pay will go up to reflect your age at the start of the new policy⁴.

Deferred periods of 4, 13, 26 or 52 weeks

The deferred period is the amount of time you have to have been off work before the policy will start paying you benefit, agreed when you took out the policy¹¹. It is the waiting room before the money starts.

The standard options are usually four, 13, 26 or 52 weeks⁴. Some insurers offer a wider menu: four, eight, 13, 26 or 52 weeks⁵. Group schemes arranged through an employer can cover a range of deferred periods, from 13 to 52 weeks¹⁶.

Typically, the default deferral period is 13 or 26 weeks, but it can be as short as four weeks¹¹. At the other end, you usually have to wait a minimum of four weeks, but payments can start up to two years after you stop work². One independent guide puts the typical range at four weeks to 26 weeks, depending upon your sick pay¹⁷.

The deferred period you pick should line up with how long your income continues without the policy. Statutory Sick Pay is paid by your employer for up to 28 weeks if you are too ill to work¹⁸, and you may be able to claim it for up to 28 weeks after you stop work². If your employer offers more generous sick pay, a longer deferred period may fit; if not, a shorter one may.

There is a catch worth knowing. If you have been unemployed for more than 12 months when you first become incapacitated, or you take a career break, a selected deferred period of less than 13 weeks will be replaced by a 13-week deferred period²⁰. The same rule appears in a career break option, where the deferred period will be either 13 weeks or the period stated in the policy schedule, whichever is longer²⁰.

You also have to tell the insurer you are claiming within set deadlines, which vary with the deferred period you chose²¹:

Missing those deadlines can complicate a claim, so it is worth diarising the date you go off sick.

How state benefits and sick pay reduce what you are paid

Income protection is designed to sit on top of whatever else you receive, not to duplicate it. Policies usually provide a proportion of your income, minus state benefits and any income from similar policies¹¹.

The main state support while you are off sick is Statutory Sick Pay. It is paid by your employer for up to 28 weeks if you are too ill to work¹⁸, and it is treated as earned income, so you pay income tax and Class 1 National Insurance contributions on it¹⁸. It is unlikely to match your normal earnings⁹.

If your average weekly earnings fall below the lower earnings limit, you lose the right to Statutory Sick Pay²². There used to be a lower earnings limit that kept many poorer households from getting paid when unwell, which is being scrapped²³.

Beyond sick pay, the benefits system may step in, but the amounts are modest and the rules are strict. If you go into hospital, your Income Support, Employment and Support Allowance, Universal Credit or Pension Credit may be reduced after 28 days, because some premiums depend on entitlement to disability benefits²⁴. There is also a minimum income guarantee, which means paying towards your support should not leave you with less than a certain amount, though the figure differs depending on your circumstances²⁵.

The practical effect is that the insurer's payout is calculated net of these sources. If your sick pay is generous, the policy may pay less during the overlap. If your sick pay runs out, the policy takes over. This is why the deferred period and your employer's sick pay scheme need to be looked at together.

Definitions of incapacity: own occupation, suited occupation or any occupation

Whether a claim is paid depends on the definition of incapacity in your policy. There are four main categories for disability in income protection insurance: own occupation, any suited occupation, any occupation whatsoever, and total disability¹¹.

The most common definitions mean that you would not be able to work in your current occupation, work in any occupation you are trained for or have experience in, work in any occupation at all, or do various daily activities like dressing, washing, eating, climbing stairs, shopping or cooking⁴.

Own occupation is the most generous. Cover on an own occupation basis is considered the gold standard for an income protection policy⁸. Under this definition, the insurer asks whether you can do the material and substantial duties of your own occupation as a result of accident or sickness, and whether you are doing any other occupation¹².

The narrower definitions are harder to claim on. If your policy uses any occupation whatsoever, the insurer can argue you could do some other job, even one that pays far less or is outside your field. Some policies cover you if you cannot do your own job or occupation, or your job or a similar one you are qualified or have the experience for²³.

There is a further wrinkle for people who are not in work. If you are a houseperson, have been unemployed for more than 12 months, or take a career break, the activities of daily work definition is used to decide claims, regardless of the definition shown on the policy schedule²⁰. Under that test, the insurer looks at whether you cannot perform three or more of a listed set of daily activities¹².

Where cover stops: lapses, unemployment, living abroad and exclusions

Income protection covers a wide range of conditions, essentially any illness or disability that leaves you unable to work, including physical conditions such as cancer or a heart attack and mental health conditions including stress¹. But there are firm limits.

If you stop paying premiums, you lose your cover⁴. You cannot cash in or surrender an income protection policy, and they do not normally pay out on death⁴. Most policies end at a certain age, like your selected retirement age, with an upper age limit of 65⁴.

Redundancy is not covered by typical basic income protection. Standard policies pay when you cannot work through illness or injury and meet the provider's definition of incapacity²⁶, not when you lose your job. Some short-term policies are designed for mortgage-related needs during illness, injury and, unlike typical basic income protection policies, redundancy¹¹. Separate redundancy insurance pays out a proportion of your salary for up to a year, or perhaps two years, and works on paying you at the end of each 30-day period you remain unemployed³.

Living or travelling abroad can suspend cover. Cover is not provided if the insured person travels or lives outside the home countries or designated countries for more than 13 continuous weeks in any 12-month period, or within the designated countries for more than 26 continuous weeks in any 12-month period¹². In one policy, cover ceases after more than 13 consecutive weeks outside the home countries or designated countries in any 12-month period, and within designated countries cover ceases after 26 consecutive weeks; cover resumes 39 consecutive weeks after return in the first case, or 26 consecutive weeks in the second²⁰.

Mental health exclusions can also apply. An exclusion relating to mental health conditions may be applied for income protection¹⁷. That does not mean mental health conditions are never covered, but it is a term worth checking before you buy.

Choosing between short-term and long-term cover

The choice comes down to what you are protecting against and how long you could manage without the money.

Short-term cover suits people who want a lower premium and who could adjust if a claim ran long: those with savings, a partner's income, or a realistic expectation of returning to work within a year or two. It also suits people whose main worry is a temporary absence, such as a planned operation or a condition with a known recovery time. The trade-off is that a long illness leaves you without the policy income once the payment period ends.

Long-term cover suits people who could not absorb a multi-year loss of earnings: those with a mortgage, dependants, or a single income in the household. It costs more, but it keeps paying until you return to work, retire or the policy ends⁸. Cover can last until your 70th birthday, or your chosen retirement age if earlier⁵.

There is a wider context here. The Financial Conduct Authority's final Pure Protection Market Study found around 58% of adults have no life insurance, critical illness cover or income protection, and most of that group have never considered their needs²⁷. The regulator concluded competition works well for those with cover but stopped short of new rules²⁷.

If you are weighing income protection against other types of cover, it helps to know what each pays for. Critical illness cover pays a lump sum on diagnosis of a listed condition, while income protection pays a regular tax-free monthly income for inability to work due to any illness or injury²⁸. Life insurance pays a lump sum on death, and mortgage protection life insurance is the cheapest type of life insurance²⁹.

Where you can get help, free and impartial, is worth knowing. The Financial Ombudsman Service handles complaints about income protection insurance if a claim is turned down or a policy is mis-sold³¹. MoneyHelper and debt advice charities offer free guidance on protection and on what to do if you cannot work. If you are comparing products, an adviser or broker can explain how the definitions and deferred periods differ between policies, which is where the real differences lie.