Why can’t I protect 100% of my income?

Why can’t I protect 100% of my income?

One of the most important types of life insurance is income protection. There’s a great deal of sicknesses and medical events that can keep us from work, and ultimately hinder our ability to fund our day-to-day necessities.

So the question I’d like to address is, why do insurers limit our income protection cover to 75% of pre-disability income – why can’t I protect 100% of my income?

In short, the answer is ‘perverse incentives’. To explain this, consider the following case study:

Alex is a 35 year old lawyer who works for ABC Legal. His income is protected up to the maximum level of 75%. After contracting lung disease, Alex’s doctor tells him he’ll need at least 6 months of recovery and rehabilitation.

Throughout the initial 6 months, Alex’s policy paid him 5 months (due to the waiting period of 30 days) at 75% of his ordinary income. At the end of the 6 months, Alex has a choice:

  1. Focus all his efforts towards getting back on track, working – and earning his full income again, or
  2. Continue receiving three quarters of his income from the insurer without working for it.

Therein lies the problem. Most families will struggle to maintain savings of more than 25%, which means that Alex and his family would have dealt with 6 months without any savings after his diagnosis. Having the opportunity to recover within 6 months and earn his full income, Alex will certainly endeavour to achieve this and provide better financial security for his family.

[pullquote4 quotes=”true” align=”center” variation=”silver” textColor=”#000000″]With as much as 80% [of income] replaced in the UK, a professor of occupational medicine claimed he regularly saw well-paid people on income protection who become “extremely passive” and have no incentive to go back to work[/pullquote4]

Had Alex’s insurer paid him 100% of his pre-disability earnings, which choice would he have taken?

About Reuben Zelwer


Reuben Zelwer established Adapt Wealth Management in 2011 to help time poor clients achieve financial freedom. For over 15 years, Reuben has helped professionals, executives, business owner and those approaching retirement make the most of their circumstances by making good financial decisions. Reuben’s professional practice is complemented by substantial voluntary work, which has included setting up financial literacy and savings programs in the local community.