The truth is that it depends on a number of factors including your age, your health, your wealth and the type of job you do to name just a few. In fact, most people would benefit from having both policies as they serve very different purposes and below 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.
1 min summary - Critical illness vs Income Protection
- Critical illness insurance provides you and your family with a lump sum payment if you become critically ill with a specific condition such as cancer
- Income protection insurance provides you and your family with an ongoing income while you are unable to work through illness or injury and can be paid up until retirement age if selected.
- It is not a case of which policy is best as both policies provide crucial benefits when it comes to protecting your family's finances in the event of serious illness or injury.
- Online comparison sites are only able to provide you with a basic price and so are unable to give you a tailored recommendation based on your own circumstances.
- The easiest way to understand whether income protection insurance or critical illness is right for you is to get free advice from an independent life insurance expert. Complete this short form* to request a callback at a time that suits you and get up to £100 cashback if you take out a policy.
Read on to learn the following:
- How Critical Illness insurance works and why you should have it
- The pros and cons of Critical Illness insurance
- How Income Protection insurance works and why you should have it
- The pros and cons of Income Protection insurance
- The rough cost of Critical Illness and Income Protection Insurance
- Why you should consider buying both Critical Illness insurance AND Income Protection if you can afford it
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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 off your mortgage or reduce the mortgage balance; to make alterations to the home if necessary or simply act as a safety net if earnings are reduced.
The illnesses that are covered are specific and the largest number of claims made are for the main three conditions covered – cancer, heart attack and strokes. 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 180+ different illnesses. Some insurance companies offer a range of critical illness covers that offer basic and comprehensive covers. Critical illness insurance cover has received some negative press in recent years regarding policies not paying out, but the truth is that there are over 95% successful critical illness claims paid each year 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.
Be careful not to confuse critical illness insurance with terminal illness insurance – the latter usually comes free with your life cover and only pays out if you are likely to die from your illness within 12 months.
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 payment can reduce debts, replace lost income or pay for private treatment
- Partial payments can be claimed for less serious conditions
- 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 are available which can be confusing
- Can be expensive
What is income protection
Income protection (sometimes referred to as permanent health insurance or sick pay insurance) pays out a regular income in the event that you are unable to work due to illness or injury. State benefits such as statutory sick pay only pay out a small amount of income for a limited period of time. 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 provides peace of mind in the form of a safety net that offers long-term income security ensuring 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 (the deferred period). There are also a number of budget versions of the insurance that can provide short-term income replacement at a lower cost.
Income protection claims can continue until your normal retirement age if you are never able to return to work or can be limited to a year or two based on your budget. The majority of income protection claims tend to be for chronic conditions such as mental health conditions or musculoskeletal issues such as back pain but a large range of injuries and illnesses are covered if they cause you to become unable to work.
For more information about income protection and how it works, check out our article “Income protection – do you really need it?”
Pros and cons of income protection
Below we have listed the pros and cons of getting income protection insurance:
- Simply covers any incapacity to work instead of specific conditions
- Plans can pay out until retirement providing long-term financial security
- Plans can be individually tailored which can help bring down the cost
- Multiple claims can be made even if the reason for the claim is the same each time
- 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
- May exclude existing medical conditions
- Many options available can lead to confusion so it is 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 income protection insurance and critical illness insurance policy side-by-side. For the purposes of the comparison, we have looked at a total critical illness payout of £100,000 tax-free lump sum 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 non-smoker
|£100,000 Critical Illness policy||£1,000 per month Income Protection policy|
|Insurance company||Vitality||Legal & General|
|Total potential payout||£100,000||£360,000|
|Paid if unable to work?||No (only if a policy definition was met)||Yes|
|Lump sum payment||Yes||No|
|Paid upon||Confirmation of diagnosis from a medical consultant that matches a covered condition||Completion of the chosen waiting time after the 1st day signed off work (3 months for this example)|
Critical illness vs Income protection: Which is best?
It is important to understand the differences between each type of insurance. Critical illness cover pays out a lump sum if you are diagnosed with an illness that is set out in full terms and policy conditions, whereas income protection cover 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 income protection insurance if you fall ill, 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). You just have to bear in mind that the critical illness cover won't pay a claim for any illness that is not listed under the cover terms and conditions which vary between policies.
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 income protection insurance and critical illness cover
|£100,000 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. A lump sum of money is useful and having £50,000 if your budget doesn't stretch to £100,000 can be sensible. Also, reducing the monthly tax-free income amount for your income protection will reduce the cost and most people will still be able to claim statutory sick pay too. Even if you are able to cover the essential bills, this will be a relief in a difficult time.
Cost of reduced income protection and critical illness cover
|£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 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 choose the best cover, be it income protection insurance or critical illness cover, based on your own circumstances. Additionally, they will be able to give you advice on how much cover you may need, as well as help 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 up to £100 cashback as a Money to the Masses reader.
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