How good is your safety net? Or, to ask the question another way, how would you manage financially if you were no longer earning?
The question confronts millions of us facing the risk of being forced off work for a protracted period through illness or injury.
And the possibility of redundancy also looms large for many employees in these tough economic times.
It is tempting to think we could rely on our employer for support, dip into savings to tide us over, or even fall back on State benefits.
But even the most generous firms do not have bottomless pockets, and few of us boast sufficient reserves to sustain ourselves beyond a few weeks or months.
As far as State benefits are concerned, even if you are entitled to anything, you certainly won't get enough to make a big dent in your monthly bills.
Income protection insurance is designed to provide a safety net by paying out if you can't work. The cover comes in various forms, so here's a run-through of what's available.
Short term income protection
You can buy a policy that provides accident, sickness and unemployment (ASU) cover, usually for a period of 12 or 24 months.
As the name suggests, the policy pays out an agreed amount each month if you are unable to earn because of injury, illness or you have been made redundant.
Demand for this sort of insurance tends to increase during tough economic times as people take action to protect their financial wellbeing.
MoneySupermarket has launched a short term income protection insurance channel designed to provide information and to help people buy this sort of cover online.
As with any form of insurance, there are various terms and conditions to watch out for when comparing ASU policies. These are the most common:
- Policies only pay out for a specified period of, say, 12 or 24 months
- You may have to be off work for a set amount of time - 30 days, perhaps - before payments will begin. The policy may specify a longer waiting period for claims due to unemployment.
- You will only get unemployment cover if there is no actual threat of unemployment when you buy your policy
- The policy might exclude any claims associated with pre-existing medical conditions
- The cost will be determined by the amount of cover you select, the 'waiting time' before payments start, and the length of time payments will be made.
The policy will state a minimum waiting time but you can reduce the premium by opting for a longer delay before payments start - perhaps you are proceeding on the basis that your savings will suffice for two or three months, or you may have a particularly generous employer.
A further option is a "back to day one" approach. This is more expensive but actually pays for all the time you are unable to earn, right back to the first day of absence from work.
However, you would still need to be away from work for the full length of the waiting period before you could claim, at which point the first payment would be backdated.
Payment Protection Insurance
Payment protection insurance (PPI) is a form of ASU protection taken out to cover the repayments on a loan or credit card.
There has been a lot of negative coverage of PPI in recent years, the problem being that it was sold to people who didn't need it, weren't eligible to take it out, or weren't even aware they were buying it from their lender or card provider.
However, the product itself can provide valuable protection if you are worried about meeting your repayments if a problem arises.
It is important, as always, to shop around for the best policy rather than simply opt for the cover offered by your lender.
Rules introduced in the wake of the PPI mis-selling scandal actually prohibit lenders from making any attempt to sell PPI until seven days after the loan or credit product has been arranged.
And a credit provider cannot make PPI a condition of the loan itself.
This means you can avoid any hard-sell tactics and take the opportunity to see what the wider market has to offer via a comparison service such as MoneySupermarket.
Mortgage payment protection insurance
Mortgage payment protection insurance (MPPI) does what its name implies - it covers your mortgage repayments while you're not earning because of accident, sickness or unemployment.
If you arrange a policy alongside your mortgage or another line of credit in mind, remember the insurer will make the pay-out to you, not direct to the lender or other financial institution.
So it remains your responsibility to settle the repayments.
Long term income protection
You can buy income protection for the long term - these policies run until the date you specify - which might coincide with your intended retirement or the date when you are due to clear your mortgage.
One of the main differences between this form of income protection and short term ASU is that unemployment cover is not provided - you can only make a claim if you are prevented from working by illness or injury.
The more expensive form of income protection cover is arranged on an 'own occupation' basis.
This means it will pay out if you cannot complete the tasks associated with your current job.
The cheaper option has less generous 'any occupation' cover, which means it won't pay out so long as you are able to do some kind of work.
So, for instance, if you were prevented by stress from working as a company executive and had 'any occupation' cover, you might not receive a pay-out on the basis that you could take a less stressful job elsewhere in the company, or even with another employer.
There are a number of other complexities associated with income protection cover - for example, you can only insure a portion of your salary (usually what you earn less tax and National Insurance) because it is illegal to use insurance to profit from a misfortune.
For this reason MoneySupermarket does not offer an online comparison service.
Instead, we have a team of expert advisers who can provide free, impartial advice and compare all income protection insurance providers to identify the best deal for you. They're available on 0800 1422013.
Help from your employer
When calculating how much short or long term protection to buy, factor in what you might get from your employer if you were made redundant or were signed-off sick for any length of time.
If you are made redundant you should be entitled to statutory redundancy pay if you have worked for your employer for at least two years.
The amount you are entitled to will be based on your weekly pay, age and continuous employment with your employer. You can work out your potential entitlement here.
Your employer may offer you a redundancy payment on top of this - you should have details in your employment contract.
As far as sick pay is concerned, employees who are unable to work because of illness or injury may be able to get Statutory Sick Pay (SSP).
It is paid by the employer for up to 28 weeks at a weekly rate of £85.85 a week, although some firms have their own sick pay schemes - you should have been given literature detailing the benefits to which you are entitled. For more details on SSP visit here.
Emma Walker, MoneySupermarket's protection expert, said of the new ASU channel: "At a time when finances are stretched but unemployment is rising, it is important to consider your protection needs because many financial problems can be put down to a sudden change in circumstances.
"By providing a transparent and streamlined service we have removed the monotony and time constraints often associated with purchasing ASU cover, especially online.
"The payment protection insurance mis-selling scandal has left many consumers without suitable financial security, but for only a few pounds a month, you can have the peace of mind that should you have an accident, become ill or lose your job, your financial needs will be met."
