Income protection and critical illness insurance both offer you financial relief if you find yourself unable to work as a result of a specified or life-changing illness, but which – if either – is better? Here, our Threshold Protection experts explain the subtle differences between these two similar and closely related insurance types.
Critical illness insurance versus income protection
It can be all too easy in life to take the money we earn for granted, never pausing to think about what would happen if that secure monthly salary was suddenly taken away. Perhaps it’s because it’s such an unsettling thought to dwell on that we don’t allow ourselves to think about it. Hoping, instead, that things will always work out OK.
While glass-half-full thinking is a lovely way to live, sometimes life throws us a curveball that we didn’t see coming; one that shakes the solid foundation our world has been built on to its core.
Being diagnosed with a critical illness
Finding yourself diagnosed with a critical illness is a prime example of life taking us down a road we didn’t expect, and when it strikes it can completely pull the rug out from under you, turning your life upside down in an instant.
Depending on the nature and extent of your illness, you may have to give up work temporarily or even altogether. This brings about its own stresses – on top of those you’re already facing, not least worries about how you’ll pay the bills and keep up with the mortgage repayments.
That’s where it pays to have insurance in place that can step in to offer you financial assistance in times where a serious illness prevents you from carrying on as normal. And that’s precisely the kind of reassurance and support that both critical illness insurance and income protection cover can offer you.
What’s the difference between income protection and critical illness cover?
Critical illness insurance and income protection both pay out a pre-determined amount of money when you’ve been diagnosed with an eligible health condition. There are, however, a couple of key differences between the two policy types:
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Difference no. 1 – how often and how much you get paid
The first thing that distinguishes critical illness from income protection is the value and frequency of the pay out. With critical illness you receive a tax-free lump sum paid to you in a single transaction.Income protection works slightly differently. With this type of insurance, you get paid a percentage of your monthly take-home salary into your bank account in instalments. Unlike your regular salary, however, these payments are tax-free.
How much you get paid with a critical illness policy also depends on whether you’ve opted for level cover or decreasing cover. With level cover, the lump sum you’re entitled to never changes. With decreasing cover, the amount you’re paid out will gradually decrease over time.
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Difference no.2 – how soon you’ll receive your payment
With critical illness cover you can make a claim on your insurance as soon as you are diagnosed. The claim will then be processed and the assured sum you’re entitled to paid out to you, even if you’re receiving sick pay from your employer.With income protection insurance, any payment you’re entitled to is dependent on the deferred period on your policy, typically, 4, 13, 26 or 52 weeks. It’s still possible to put in a claim with your insurer in the meantime, but you won’t receive payments until the deferred period has elapsed. A deferred period is set to dovetail with any employer sick pay benefit you may receive, although normally there’s a minimum deferred period of 4 weeks, meaning you’d have to be unable to work for at least 4 weeks before the policy begins to pay.
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Difference no.3 – how many times you can claim on the policy
Another key difference between critical illness and income protection is the number of claims you can make on the policy. With income protection, you can make as many claims as is necessary for the period in which you’re insured.Critical illness, however, doesn’t offer you this entitlement. You might receive partial payments from your policy for less severe conditions but when the policy has fully paid out it will automatically end, at which point you’ll no longer be insured.
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Difference no.4 – how long the policy is valid for
A critical illness policy will offer you cover for the term of your policy, however, the cover will cease if you make a claim and the policy pays out in full.Income protection, on the other hand, offers you the option of short-term cover (which will pay out for a maximum of typically two years) or long-term cover, which will pay out until you reach retirement, or until the policy ends.
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Difference no.5 – how many people you can insure on the policy
The final difference between income protection insurance and critical illness cover boils down to how many people the policy covers. With critical illness, it’s possible to take out a joint policy with your spouse or partner, and with many insurers you can add child critical illness cover to your policy.This is different from Income protection cover, which can only be taken out by an individual applicant. This is because income protection insurance is paid in direct proportion to your salary and based upon individual circumstances.
Income protection or critical illness – which is better?
Whether critical illness or income protection cover is better for you depends on your lifestyle, your living arrangements, and what you need the policy to do.
These are some of the things that our Protection team will work through with you, to help you to ensure you have the right level of cover in place to meet all your financial outgoings.
To get started with a comparison quote for income protection versus critical illness cover, click here to contact us.
Approved by The Openwork Partnership on 28/11/2023