Income Protection Insurance vs Critical Illness Cover: A Guide

Income protection insurance provides you with a financial safety net if you are ever unable to work due to illness or injury, by paying you a percentage of your salary in regular instalments. This is compared to critical illness cover, which pays a one-off lump sum if you are diagnosed with a critical, or life-threatening, illness that is on an insurer’s list of covered conditions.

As they both offer a level of financial peace of mind in relation to illness, these protection products are often confused for one another or are sometimes mistakenly assumed to be the same thing. It is therefore worth noting that, although similar in nature, these are two distinct insurance products, with their own purposes and benefits.

Not sure if you need income protection insurance or critical illness cover? Choosing which of these is right for you will depend on your own unique set of circumstances, including your age, job, health and more. The best first step in deciding whether you need one, the other or both is to gain a full understanding of each product, including what they are and what they cover. Read on to understand more about the differences in our guide.

What is critical illness cover?

Critical illness cover is a type of protection plan which aims to pay out a lump sum if you become seriously ill or disabled due to a medical condition. Only certain conditions are covered, and these can vary from provider to provider, with some commonly claimed for conditions being cancer and heart attacks.

These more serious conditions would, in most cases, leave a person unable to work full time or in the same capacity either temporarily or permanently. Some conditions may carry additional expenses of their own that sick pay or state benefits may not cover, for example treatment, equipment or home adjustments. Critical illness cover is there to help with these financial burdens and help with your usual expenses, such as bills, so you can prioritise your recovery or rehabilitation without worrying about money.

There are no restrictions on how you use any money paid out from your critical illness cover, and you can spend it how you see fit. Receiving a large sum of money at once can be helpful for tackling bigger costs or paying off your mortgage. As this type of policy generally only offers a one-off lump sum, there is no guarantee that the money will last for as long as you may need.

What illness does critical illness insurance cover?

Critical illness cover will cover you for a range of conditions which are usually long-term, serious conditions that may be life-altering. The full list of illnesses or conditions that are covered by a policy will depend on the insurer, but some examples include:

• Blindness
• Loss of limb
• Cancer
• Heart attack
• Organ failure
• Parkinson’s Disease

When selecting a policy, it’s important to find out exactly which conditions you’ll be covered for and if there are any limitations. For example, some insurers will only cover you for cancer in advanced stages.

Another thing to consider is exclusions; not all illnesses are covered by critical illness insurance and it’s unlikely you’ll be able to claim for conditions that you or a close relative have had previously. Whether or not you can claim on your policy also depends on the severity of your illness or incapacity, as you will need to be extremely unwell or severely and permanently disabled in order to receive a pay-out.

Before you settle on a particular illness insurance plan, it’s always wise to make sure you’ve weighed up all your options. For example, would you benefit more from critical illness cover, where you may pay a little less and receive a one-off lump sum for extremely serious illness? Or, if you’re happy to potentially pay higher premiums to be covered for more illnesses and to receive regular, ongoing payments if you need to claim, would income protection insurance be a better fit?

Does income protection insurance cover illnesses?

If you have a break in income due to illness, income protection insurance will provide you with regular payments to replace part of your salary, so that life can keep ticking along while you focus on getting back to yourself. Depending on your policy and your insurer, these payments can continue until you return to work, retirement, the end of the term of the plan or your death. Essentially, these plans aim to pay your claims for as long as you need them, but this will depend on the terms of your chosen plan.

Income protection insurance usually covers you for a broad range of illnesses, both physical and mental, and injuries, provided that you have been left unable to work as a result. Like any illness insurance, not all conditions will be covered by every insurer and there may be exclusions that will apply depending on any pre-existing illnesses you have or any hereditary conditions that are in your family. For more information, see: what does income protection not cover?.

With most insurers, the cost of your premiums will depend on various factors including your age, occupation, health, how much cover you need and your chosen waiting period. Although that’s not the case for all providers, for example at Shepherds Friendly we do not increase your premiums based on your health, hobbies or occupation. You can also choose between short-term and long-term cover depending on whichever suits your needs best.

Short-term plans are a more budget-friendly way of protecting your income, as premiums tend to be lower. However, these plans have a maximum claims period, meaning you will only be able to claim for a set amount of time, even if you are still unable to work. Whereas a long-term plan, although more expensive, will often pay out for as long as you need, and you may be able to claim multiple times for the same condition.

Why would you need income protection insurance?

Not all employers provide sick pay and, of those that do, this usually only lasts for around six months. After this, Statutory Sick Pay will apply which, at only £109.40 per week for a maximum of 28 weeks, may not cover all of your everyday expenses. Alternatively, if you are self-employed, you won’t have the option of sick pay to rely on. In these instances, income protection cover could prove to be invaluable. Find out more about the benefits of income protection insurance.

Some policies also come with additional benefits that may be useful for you on a day-to-day basis. For example, here at Shepherds Friendly, members who hold an Income Protection Insurance plan with us get access to our Enhanced Benefits which include 24/7 access to Nuffield Health’s GP service and discounted gym memberships.

If you have income protection included as a work perk or if you could survive on sick pay, your savings or with the support of a partner, you may not need this type of cover.

Still unsure if you’ll benefit from taking out a plan? This may help: Is income protection worth it?.

When can you claim income protection insurance?

One question you may have when considering a plan is “when can you claim on income protection insurance?”. There isn’t one answer, as this varies depending on your policy’s terms and conditions.

In most cases, you won’t be able to claim right away if you become unable to work due to illness or injury and there is a waiting period that will need to pass before you can make a claim. This is also called a deferred period and can range from four weeks to a year. Some insurers, like us, will also offer a one-week deferred period which could be useful for those who would not receive any form of sick pay. You will decide how long your deferred period will be when you take out your plan. The longer the deferred period, the lower your premiums could be.

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