July 2nd, 2020

Income protection vs critical illness cover – which is right for you?

Income protection vs critical illness cover: two policies designed to protect you financially should illness or injury impact your ability to generate an income. But how do the policies differ, what exactly do they cover and – most importantly – which is right for you?

It’s hard to think about a future in which fate hasn’t been as kind to you as you’d hope. But have you considered how you would cope financially if an unexpected illness or injury left you temporarily or permanently unable to work? For peace of mind, many people turn to income protection or critical illness cover. These insurance products are designed to help you keep up with your overheads – such as rent or mortgage payments, debt repayments and living expenses – should illness or injury affect your ability to generate income.

But how do these policies compare?

Let’s assess the benefits of income protection vs critical illness cover.

Making a claim

The most important aspect of any insurance product relates to the dynamics of making a claim. With critical illness cover you receive a tax-free lump sum if your claim is successful. Pay outs tend to be sizeable, paid to you directly and yours to spend as you wish. However it’s crucial to remember that critical illness cover is a single-use policy. Following a successful claim, your cover terminates.

With income protection, following a successful claim, you receive a portion of your monthly income – usually between 60% and 80% – while illness or injury prevents you from working. This will be paid to you in regular instalments until you return to work, retire or break from your policy – whichever comes first. Again the pay out is tax-free, paid to you directly and yours to spend as you wish. And unlike critical illness cover, you can claim multiple times across the duration of your income protection policy agreement. In short: whenever illness or injury leaves you unable to work, you can claim.

Challenges and limitations

Because critical illness cover is a one-use-only policy, it’s important to consider very carefully how much of a lump sum you would need to secure your long-term financial wellbeing. That can be difficult to calculate without the help of a professional.

>> How much critical illness cover do I need?

With income protection meanwhile, achieving a pay out that provides the security you need can be difficult if your provable income doesn’t reflect your total earnings. For example if you pay yourself via dividends or rely on income from non-contractual sources, it can be difficult to get the level of protection you require.

Another thing to bear in mind is the fact that payment from an income protection plan will only start once you have been unable to work for a certain duration. It’s up to you to decide how long this period will be when creating your policy – and it has a direct impact on how much you will pay for your cover. For example, a policy that allows you to claim after one week off work will be more expensive than a policy where you agree to wait four weeks until you can claim.

Finally, both critical illness and income protection cover tend to exclude claims that arise as a result of alcohol, drugs, pregnancy and pre-existing medical conditions.

How much does each policy cost?

With both critical illness and income protection cover, the premium you pay depends on lots of different factors – such as your age, medical history, income and more. However, in general, income protection does tend to be the cheaper option in terms of the monthly/annual premium you pay.  

What are you actually covered for?

This is where you have to be careful when comparing policies. Each critical illness policy has a specified list of illnesses that you can make a valid claim for. If your condition isn’t on the list, you won’t be able to make a successful claim – regardless of how unwell you are. And unfortunately this list is often quite limited in scope.

As the name suggests, critical illness cover only covers critical illnesses. So for example, if you injured your back playing squash and were forced off work, don’t expect the provider of your critical illness cover to pay out. On the other hand if you were to have a heart attack or receive a cancer diagnosis, you will most likely have a claim. And the security that a critical illness lump sum provides could support you in making major lifestyle changes.

Income protection is far more expansive in terms of scope. In a nutshell: if illness or injury leaves you unable to work for an extended period of time, your policy will almost certainly pay out. That means things like sprained wrists, dislocated shoulders and mental health issues are all permissible claims, which wouldn’t be the case with critical illness cover.

Are there any other policy benefits?

Both income protection and critical illness policies often come with a range of additional benefits – such as access to counselling services and private GPs. Several income protection policies also include access to subsidised or complimentary rehab services. And with regards to your future financial security, with income protection you can make provisions for pension contributions to be deducted from any pay out you are receiving.

Need some advice?

Choosing between critical illness and income protection cover isn’t always easy. Every person is different, and every policy is too. The best option for your best friend may not be the best option for you. And in certain circumstances, the best decision can be to get both policies.

If you would like to discuss your options, please come and talk to us. As highly experienced independent financial advisers with Chartered Financial Planner status, we can remove the guesswork to help you make confident decisions for your financial future – without detracting from your present. Get in touch to start the conversation.

Nothing in this article constitutes, or is intended to constitute, financial advice. You should always seek advice from a professional financial adviser who is familiar with this type of arrangement to ensure any recommendations made are suitable to your needs and circumstances.

You may also be interested in:

>> Is income protection insurance a taxable benefit?
>> Is critical illness insurance a taxable benefit?