Income Protection vs Payment Protection Insurance (PPI): What's the Difference?

The quickest way to tell them apart: income protection insurance pays you a regular, tax-free share of your income if you can't work due to illness or injury, potentially all the way to your planned retirement age. Payment protection insurance (PPI) only ever covered the repayments on one specific loan, credit card or mortgage, and usually for no more than 12 to 24 months. If you're comparing the two because you've seen "PPI" mentioned while shopping for income protection insurance, the products are related in spirit, both exist to keep money coming in when you can't work, but they're very different in scope, size and how long they last.

• Income protection: covers your whole income, not just one debt, and can pay out for years.
• PPI: covers repayments on a single loan, credit card or mortgage, usually capped at 12-24 months.
• Availability today: PPI is rarely sold as new cover, most lenders now offer Accident, Sickness and Unemployment (ASU) insurance instead.

Income protection insurance is a long-term policy that replaces part of your income if you're unable to work because of illness, injury or a disabling health condition. Unlike a savings account or an emergency fund, it keeps paying every month for as long as you're off work and the policy remains in force, and understanding how income protection insurance works helps explain why some plans can pay right through to your chosen retirement age.

• Deferred period: most policies have a waiting period before payments start, commonly 4, 8, 13 or 26 weeks. Choosing a longer deferred period usually lowers your monthly premium.
• Benefit amount: insurers typically pay 50-70% of your gross income each month, tax-free if you pay the premiums yourself.
• Claim triggers: most policies pay out for any illness or injury that stops you doing your own job, not just a fixed list of named conditions.
• Length of cover: you choose between short-term policies, paying for one or two years per claim, and long-term policies, paying until you return to work or retire.

Because it's built around your income rather than a single debt, income protection is the broader and more flexible of the two products.

Payment protection insurance (PPI) was an add-on policy sold alongside a specific loan, credit card, mortgage or store card, designed to cover the repayments on that one debt if you lost your job, fell ill or had an accident. It became notorious after the Financial Conduct Authority and the Financial Ombudsman Service found that millions of policies had been mis-sold between the 1990s and 2010s, often to people who couldn't actually claim on them or didn't realise they'd bought one at all.

• What it covered: the minimum monthly repayment on one named loan, credit card or mortgage, nothing more.
• Typical duration: cover usually lasted 12 months, occasionally up to 24 months, per claim.
• Where it stands today: new PPI sales largely stopped after the mis-selling scandal, and lenders now sell Accident, Sickness and Unemployment (ASU) insurance as the modern replacement, working in a similar way but marketed and regulated more transparently.

If you're being offered protection alongside a new loan or mortgage today, it's almost certainly ASU insurance rather than PPI in its original form.

Set side by side, the two products look similar on the surface. Both exist to keep money coming in when you're unable to work. But they differ in almost every practical respect: what they cover, how much they pay each month, how long the payments last, and how thoroughly you're assessed before cover starts. Someone comparing quotes for the first time often assumes PPI and income protection are simply two names for the same idea, largely because both were historically sold as "protection" add-ons through banks, brokers and lenders. In reality they solve different problems: PPI protects a lender's interest in getting one specific debt repaid, while income protection protects you and your household's ability to cover every bill, not just the one attached to a loan agreement. That distinction matters most at claim time, when a PPI policy stops paying the moment its cap is reached, regardless of whether you're back at work. The table below sets out the seven differences that matter most when deciding which one, or which combination, suits your situation.

The single biggest takeaway from the table above: income protection is broader and typically pays out for far longer, while PPI, and its modern equivalent, ASU insurance, is narrower, cheaper and shorter-lived because it only ever needs to cover one fixed repayment. Medical underwriting is also handled very differently. Income protection insurers assess your health in detail at application, so it's worth understanding how pre-existing conditions affect your cover before you apply, whereas PPI used lighter checks upfront but relied on exclusions at claim stage, which was part of what made it so controversial. Tax treatment differs too: income protection payouts are tax-free if you pay the premiums yourself from taxed income, and PPI payments, made directly to the lender, were never treated as your taxable income either. Neither product creates an extra tax bill when it pays out, the real difference is in how much reaches you and for how long.

Numbers make the difference concrete. Picture a 35-year-old earning £30,000 a year, around £2,500 a month before tax, who injures their back and can't work for 18 months. They also have a £10,000 personal loan taken out over five years, with monthly repayments of around £200. Below is what each type of policy would actually pay across that 18-month absence, based on typical policy terms, so you can see the gap in real pounds rather than abstract percentages.

Methodology and assumptions: an 8-week deferred period on both products, an income protection benefit of 60% of gross salary (a common mid-range figure), a PPI/ASU payout equal to the loan's monthly repayment, and a 12-month PPI benefit cap, which was standard on most policies sold before 2019. Real payouts depend entirely on the individual policy, insurer and underwriting decisions, so treat this as an illustration rather than a guarantee of what any specific policy would pay.

Deciding between the two comes down to what you're actually trying to protect: one debt, or your whole income.

• Choose PPI or ASU insurance if: you only want to cover the repayments on one specific loan, credit card or mortgage for a limited period, typically because it's added cheaply at the point of borrowing and you don't need cover beyond 12-24 months.
• Choose income protection if: you want your mortgage or rent, household bills and everyday living costs covered for as long as you're unable to work, not just one repayment.
• You have no choice if you're self-employed: PPI and ASU insurance are only ever sold alongside a specific loan, so if you don't have an active loan, or you're self-employed and never took one out through a bank, you simply cannot buy PPI. Income protection for the self-employed is designed to work without a lender in the picture at all, replacing your income directly rather than a repayment.

For most people juggling a mortgage, bills and everyday costs, income protection covers far more of what actually goes wrong when illness strikes.

Yes, you can hold income protection and PPI or ASU insurance at the same time, and plenty of people do, particularly if they took out ASU cover years ago alongside a mortgage and later added a standalone income protection policy for broader protection. The two aren't mutually exclusive because they're assessed and paid separately by different insurers.

The catch is overlap. Insurers offering income protection typically cap the total income you can insure across all your policies combined, usually somewhere around 60-70% of your gross income, specifically to stop over-insurance where a claim could pay out more than you actually earned while working. If you already have ASU cover paying £200 a month towards a loan, your income protection insurer may take that into account when calculating your maximum benefit. Always declare any existing protection policies, including old PPI or ASU cover, when you apply, and check the total percentage of income covered across everything you hold before assuming you're fully protected.

PPI became one of the biggest consumer redress stories in UK financial history. Between the late 1990s and 2010, banks and lenders sold millions of PPI policies alongside loans, credit cards and mortgages, often to people who were self-employed, unemployed or had pre-existing conditions that meant they could never actually claim, and frequently without making clear that the policy was optional. Following widespread complaints, the Financial Conduct Authority and the Financial Ombudsman Service investigated the scale of the problem and set a final deadline of 29 August 2019 for new PPI mis-selling complaints, after which lenders had paid out an estimated £38 billion or more in redress across the industry.

That scandal is the main reason PPI has almost disappeared from the market. Most banks and lenders stopped offering new PPI policies altogether and replaced them with Accident, Sickness and Unemployment (ASU) insurance or standalone mortgage payment protection insurance, sold with clearer terms and more transparent pricing. If you're offered protection alongside a new loan today, it will almost certainly be one of these modern equivalents rather than PPI itself.

Cost is where the two products diverge sharply, because they're insuring very different amounts of risk. Income protection premiums are based on your age, occupation, health and how much of your income you want to replace, so how much income protection insurance costs varies widely between a healthy office worker in their thirties and a smoker doing manual work in their fifties. PPI and ASU insurance premiums, by contrast, were historically priced as a percentage added to the loan itself, typically 13-20% on top of the APR, so the cost scaled with how much you borrowed rather than with your income or health. That means someone with a small, low-risk loan paid very little for PPI, while someone borrowing a large amount paid considerably more, regardless of how healthy they were or how much income they actually needed to protect. It also means two people earning wildly different salaries could pay near-identical PPI premiums simply because they borrowed a similar amount.

Now that you can see how differently these two products behave in a real claim, the next step is working out how much cover you'd actually need. Start by using our calculate how much cover you need tool to get a personalised benefit estimate based on your income, outgoings and any existing protection you hold, including old PPI or ASU policies. If you're weighing up multiple types of protection at once, it's also worth reading how income protection vs critical illness insurance compares, since the two are often bought together, and reviewing your life insurance alongside them so your family and your income are both covered.

The figures and worked example in this guide are for illustration only. Actual premiums, benefit amounts and payout durations depend on your personal circumstances, the insurer's underwriting decisions and the specific policy terms you choose, so speak to a regulated adviser before buying either type of cover.