In this article we take a look at two financial protection products, critical illness insurance and income protection. We explain what each policy is, how each policy differs, how much each policy might cost you, which policy is worth buying and whether either policy is worth the money. First, let's understand how each policy works and exactly what your monthly premiums are paying for.
What is critical illness cover?
Critical illness insurance is a policy that pays out a lump sum if you are diagnosed with a critical illness that meets the definition as set out by the insurance company's list of covered conditions. The lump-sum payment is designed to provide a financial boost when you need it most, easing the financial burden and enabling you to focus on recovery. The money could be used to pay a lump sum off of the mortgage, to make alterations to the home if necessary or simply to act as a safety net if earnings are reduced.
The number of illnesses you are covered for will depend on the insurance company you take the policy out with, but it will range from around 50 to 150 different illnesses. Critical illness insurance has received some negative press in recent years regarding policies not paying out, but the truth is that over 95% of critical illness claims are successfully paid with the majority of declined claims being down to non-disclosure. If you want to maximise your chances of your critical illness policy paying out then you should speak to an independent specialist as they will be able to explain exactly what you are buying and help to complete the application forms, minimising any chance of non-disclosure should you ever need to claim.
Pros and Cons of critical illness cover
Below we have listed the pros and cons of getting critical illness insurance:
- Tax free payout
- Lump sum
- Some plans will pay out if your children become critically ill
- Up to £100 cashback available - click to find out more
- You have to meet the definition as set out by the insurer
- Many different options available which can be confusing
- Can be expensive
What is income protection
Income protection (sometimes referred to as permanent health insurance) pays out a regular income in the event that you are unable to work through illness or injury. State benefits such as statutory sick pay only pay out a small amount of income and so if you find yourself unable to work due to illness or injury you could quickly find yourself in serious financial trouble. Income protection insurance ensures that you can continue with the quality of life that you have come to expect and can enable you to focus on recovery.
The policy is priced based on a variety of factors including your health, the type of job you do and how quickly you would like the policy to pay out. For more information about income protection and why it is so important, check out our article 'Despite the risk of losing their home, only 20% of homeowners have this insurance in place'
Pros and cons of income protection
Below we have listed the pros and cons of getting income protection insurance:
- Plans can pay out until retirement
- Plans can be individually tailored which can help bring down the cost
- Payments are tax-free
- Up to £100 cashback available - click to find out more
- Individually assessed based on your job type and health and so can be expensive
- Many options available which can lead to confusion. Best to speak to an independent specialist
- Can only insure around 60% of your gross income
Critical Illness vs Income Protection comparison table
Below we compare a typical critical illness and income protection policy side-by-side. For the purposes of the comparison we have looked at a total critical illness payout of £150,000 compared to an income protection policy that would pay out £1,000 per month. Both policies run up until age 65.
Critical illness and income protection quotes based on a 35-year-old female accountant (non smoker)
|£150,000 Critical Illness policy||£1,000 per month Income Protection policy|
|Insurance company||Zurich||Legal & General|
|Total potential payout||£150,000||£360,000|
|Paid if unable to work?||No (only if a policy definition was met)||Yes|
|Lump sum payment||Yes||No|
Critical illness vs Income protection: Which is best?
It is important to understand the differences between each type of insurance. Critical illness pays out a lump sum if you are diagnosed with an illness that is set out in the policy conditions, whereas income protection will pay out a guaranteed income in the event that you are unable to work and will continue to do so until you either die, retire or are fit to return to work.
You are more likely to claim on income protection insurance, however, as it only pays a monthly income during the period that you are unable to work, it is likely to pay out a lower amount than if you were to successfully claim on a critical illness policy.
Critical illness provides an immediate cash boost and, as the total benefit is paid in full upon a successful claim (so long as you meet the policy definition) there is nothing stopping you from returning to work and being significantly better off, compared to having taken out an income protection policy (as the income protection policy would have only paid out for the period that you were unable to work).
Critical illness and income protection premiums are hard to compare side by side, due to the fact that they provide a very different type of cover, however, based on our comparison above (which is a fair representation of the sort of options a 35-year-old would consider) critical illness cover is a little more expensive.
The answer ultimately is that critical illness and income protection insurance are equally important as they provide different types of financial protection for you and your family. In an ideal world, you should probably have both, however as a compromise, you may want to consider having a little of each. We give an example of how this may work below.
Cost of taking out both critical illness and income protection
|£150,000 Critical Illness||£1,000 per month Income Protection||Total Cost|
Reduce the amount of both critical illness and Income protection meaning you don't have to choose between them and are covered for both eventualities
|£50,000 Critical Illness||£500 per month Income Protection||Total Cost|
Where to buy the best critical illness and income protection policies
Critical illness and income protection insurance are fairly complex insurance policies and so it is often best to speak to an independent specialist to make sure that you are purchasing the best policy for you. To demonstrate this point, when researching this article and having received over 30 income protection quotes, the most comprehensive quote for comparison purposes was actually the 19th result on the page. The previous 18 results either had a reduced benefit period of 1 to 5 years (rather than paying out until retirement) or an age-banded premium, meaning the premiums would increase each year. Without any prior knowledge or additional help and advice, it would have been easy to buy an inferior policy that offers far less value.
An independent insurance specialist* will be able to explain all of the policy options and help you to choose the best one for your own circumstances. Additionally, they will be able to give you advice on how much cover you may need, as well as helping you to complete the application forms and chase the insurance company on your behalf.
We have personally vetted the services of one of the UKs' leading insurance brokers*, which specialises in finding the most suitable cover at the cheapest possible price. To speak to an adviser, with no obligation to take things further, simply complete the form via the above link. The firm employs strong ethics and will only ever offer a policy if it is the best policy to suit your personal needs. If you are happy with their service and decide to take out a policy you will also qualify for £50 cashback for a single policy or £100 cashback for a joint policy, payable once you have paid £50 or £100 in premiums.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article - LifeSearch
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