Financial planning: Does the target income hide the real expenses?
Hey, Quentin here. Yes: a target income can mask your actual expenses; first calculate your essential costs and financial needs, then adjust your coverage to that amount. Income protection should cover a specific shortfall, not just display a reassuring percentage. In 2026, also check the waiting periods, caps and tax rules in your policy.
Things to do without delay
- List your essential monthly expenses and fixed costs.
- Identify the income that would continue during a period off work.
- Check your policy’s waiting period and benefit caps.
- Check that the disability and death benefits are suitable for your household.
- If you have a self-employed policy, ask how premiums and benefits are treated for tax purposes.
To distinguish personal income from business expenses, see this guide to business expenses and personal income. If you’re self-employed, you can also look into the tax and social security implications of income protection for self-employed workers.
Income protection: calculating a target income based on actual expenses
A target income shouldn’t be chosen at random or automatically set at 80% of your salary. Start with your family budget: housing, food, loans, transport, childcare and healthcare costs. Then add any business expenses that would continue while you’re off work.
Subtract any income that would still be available, such as continued salary payments from your employer or benefits from the state scheme. The resulting shortfall gives you an initial estimate of the loss of income to cover. Also consider taxes and any contributions: the amount paid by the insurer isn’t always the net amount you’ll have available.
A simple way to assess your financial needs
Clara, an employee and mother of two, discovers that her expenses don’t go down at the same rate as her salary when she’s off work. Her rent, loan repayments and everyday costs still have to be paid, so she recalculates her coverage based on her essential expenses instead of aiming for a theoretical percentage.
“Useful coverage starts with clearly identified expenses.” This approach helps protect your standard of living without paying for cover that isn’t properly tailored to your needs.
Waiting periods, caps and exclusions: details that affect your coverage
Your policy may provide a daily benefit, but payments don’t necessarily start on the first day you’re off work. The waiting period is the time you have to wait before payments begin; a shorter waiting period may cost more, while a longer one means you need to have sufficient savings.
Also review the benefit caps, payment period and exclusions. Some policies may treat pre-existing conditions, back problems or mental health conditions differently. The definitions of incapacity and disability also matter: they determine the circumstances in which the insurer will pay out.
| What to check | Practical question | Possible impact |
|---|---|---|
| Waiting period | How long can you manage without benefits? | Determines how much readily available savings you need. |
| Benefit amount | Is it fixed or calculated based on the insured income? | Changes the income you actually receive. |
| Benefit cap and duration | For how long can benefits be paid? | Limits coverage during an extended period off work. |
| Exclusions | Which situations aren’t covered? | May reduce the protection you expect. |
If you’re dealing with a short absence and have savings available, a longer waiting period may work for you; if your fixed costs are substantial from the very first month, look for faster coverage.
Disability, death and taxes: protecting your household beyond time off work
Temporary incapacity isn’t the only risk to consider. In the event of a long-term disability, a supplementary pension can help offset a drop in income; in the event of death, a lump sum or pension can support your loved ones. Check the named beneficiaries and make sure the amounts are appropriate for your debts and your family’s needs.
Tax treatment depends, among other things, on your status, the type of policy and whether premiums can be deducted. For self-employed people, certain policies that meet the applicable conditions may allow premiums to be deducted within limits set by tax rules; in return, benefits may be taxable. Confirm how your policy is treated before filing your tax return.
Three steps to adjust your income protection insurance
- Step 1: add up your household’s essential expenses and any business costs that would continue while you’re off work.
- Step 2: subtract the income maintained by state schemes, your employer and any savings you can draw on.
- Step 3: compare the remaining shortfall with your policy’s benefits, waiting periods, caps, exclusions and disability coverage.
This method gives you a starting figure to discuss with your insurer or an adviser. My article offers this guiding principle: build financial protection around your actual expenses, then review it as your work, costs or family circumstances change.
How do you calculate a target income for income protection?
Add up your essential expenses and any business costs that will continue, then subtract any income that will be maintained and any available resources. The resulting shortfall gives you an initial estimate of the amount you need to cover.
Should you aim for a fixed percentage of your salary?
Not necessarily. A percentage doesn’t always account for fixed costs, household composition, a partner’s income or benefits that are already in place.
What should you check before taking out income protection insurance?
Compare the waiting periods, benefit caps, payment duration, exclusions and definitions of incapacity and disability. Also check the tax treatment applicable to your situation.
Thank you for your interest; best wishes, Quentin
