Critical illness vs Income Protection: Which is best?

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
• Compare the cost of Critical Illness and Income Protection Insurance
• How to tailor Critical Illness Insurance and Income Protection into your budget

Critical Illness vs Income Protection – benefits compared

Critical Illness Insurance	Income Protection Insurance
Cash lump sum could be used to pay off or reduce debts	Income could be used to keep up mortgage or debt payments
Cash lump sum could be used to make lifestyle adaptations	Income could be used to pay for childcare or other new regular costs that arise
Suits those who are worried about serious illness such as cancer	Suits those who are worried about losing income due to incapacity
Cover available for earners or non-earners	Cover for earners who will have to disclose job and 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 vs Income Protection cost comparison

	£100,000 Critical Illness policy	£1,000 per month Income Protection policy
Monthly Cost	£37.21	£14.50
Insurance company	AIG	Legal & General
Total potential payout	£100,000	£360,000
Paid if unable to work?	No (only if a policy definition was met)	Yes
Monthly Benefit	No	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)

All quotes are correct as of March 2024 and are based on a healthy 35-year-old non-smoker in a clerical occupation

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 is listed in the conditions covered by your policy. The cash lump-sum payment is designed to provide a financial buffer when you need it most, easing the financial strain caused by lost income and extra costs such as childcare, accommodation and travel, enabling you to focus on your recovery.

Your critical illness insurance payout can 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. Importantly, you choose how to spend the money giving you flexibility to meet whatever financial needs you face at the time of your illness.

The illnesses that are covered by critical illness insurance are specific and the largest number of claims made are for the main three conditions covered – cancer, heart attack and stroke. The number of illnesses you are covered for will depend on the critical illness policy you choose, but it will range from around 50 to 180+ different illnesses. Some insurance companies offer a range of critical illness covers that offer a choice of basic and comprehensive covers so you can choose according to how much you wish to spend.

Do critical illness cover policies pay out?

Critical illness insurance cover 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 each year. The majority of the small number of declined claims occur because policyholders haven't understood what is covered so they claim for a condition that is not listed on their policy. Other declined critical illness claims occur because the policyholder was not truthful about their health and lifestyle when they applied for the cover – this is called non-disclosure.

If you want to maximise the 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 of charge with your life insurance 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:

Pros

• Tax-free payout
• Lump sum cash payout can reduce debts, replace lost income or pay for private medical treatment
• Can cover a person even if they do not earn an income
• 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* 

Cons

• Your medical condition will have to match the specific definition wording used 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 if 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 and your income stops, 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 a replacement income while you recover. This long-term income security ensures that you can maintain the quality of life that you have come to expect and enables 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 some 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 number of claims are also made for conditions that overlap with critical illness insurance such as as cancer 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:

Pros

• Simply covers any incapacity to work instead of specific conditions
• Income can continue to be paid until retirement providing long-term financial security
• Plans can be individually tailored which can help bring down the cost
• Multiple claims can be made for separate period of time off work for the same or different reasons
• Payments are tax-free
• Up to £100 cashback* available

Cons

• Individually assessed based on your job type and health and so can be expensive
• May exclude existing medical conditions
• High-risk and heavily manual workers may have to seek specialist cover to keep costs down
• Many options available can lead to confusion so it is best to speak to an independent specialist
• Can only insure around 65% of your gross income

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.

Should you buy both income protection insurance and critical illness insurance?

Buying both types of illness insurance, income protection insurance and critical illness insurance could be the best solution if you earn an income and would like to receive a lump sum of money if you became seriously ill. It isn't necessary to choose between these two types of insurance.

If you are not reliant on your ability to work to earn an income, income protection is unlikely to be available to you so critical illness insurance is likely to suit you.

There is a common misconception that you should choose between these two types of insurance but it is possible to buy both without breaking the bank. Tailored insurance will allow you to buy protection against loss of income and serious illness. Below we have explained how a tailored income protection and critical illness insurance solution would look and how much it would cost.

Cost of taking out both income protection insurance and critical illness cover

	£100,000 Critical Illness	£1,000 per month Income Protection	Total Cost
Monthly cost	£37.21	£14.50	£51.71

All quotes are correct as of March 2024 and are based on a healthy 35-year-old non-smoker in a clerical occupation

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
Monthly cost	£18.53	£7.25	£25.78

All quotes are correct as of March 2024 and are based on a healthy 35-year-old non-smoker in a clerical occupation

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.

There are specialist insurance companies that may be cheaper and more suited to people in certain occupations so it is vital that you do not choose a quote on the basis of branding alone. While companies such as Legal & General, Vitality, Aviva and AIG will be known to most, lesser-known insurers such as Holloway and The Exeter can provide excellent income protection solutions for people with specific needs.

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. Most importantly, the advisers have access to a wide range of critical illness and income protection policies and will search the market on your behalf.

We have personally vetted the services of one of the UK's 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