The difference between income protection and critical illness cover

Income protection insurance and critical illness cover are both insurance plans designed to support you financially in the event of significant health issues. Whilst they have similarities and can be confused with one another, they are two different types of cover, each with a distinct purpose and unique benefits.  

In this guide, we’ll compare income protection vs critical illness, exploring the main similarities and differences. 

Understanding Critical Illness Cover and Income Protection

Not sure if you need critical illness or income protection insurance? Choosing the best option depends on your circumstances – you should consider your age, job, and health in your decision-making process. The best first step in deciding whether you need one, the other, or both is to research each product to understand what they protect and how they work.  

What is income Protection insurance? 

Income protection insurance typically allows you to receive up to 70% of your income if you can’t work due to illness or injury. When setting up a plan, you pick your premium amount (monthly payment) and the percentage of your income you want covered; usually, higher premiums protect more of your income. If you need to make a claim and it’s successful, you’ll receive the agreed portion of your salary in regular, tax-free instalments. 

This type of cover is designed to look after you and help you focus on your recovery if you ever have health concerns that prevent you from working. The amount of time your payments last depend on your plan and insurer but, in some cases, payments can go on until you can return to work, retire, or the plan ends.  

Income protection insurance aims to provide financial support for as long as you need it, though terms vary by plan. That’s why it’s always a good idea to compare providers and plans before committing.  

What is Critical Illness Cover?

Critical illness cover is a protection plan that pays a one-off lump sum if you are diagnosed with a critical illness on your insurer’s list of covered conditions. For example, cancer and heart attacks are commonly claimed conditions through critical illness cover. These more serious conditions would, in most cases, leave a person unable to work full time or in the same capacity, whether temporarily or permanently.  

Some conditions carry additional expenses that sick pay or state benefits may not cover, including related treatment, equipment or home adjustments. Critical illness cover is there to help with these financial burdens and support you with your usual expenses, such as monthly bills. This means you can prioritise your recovery or rehabilitation without money worries on top of everything. 

Similarities between Critical Illness Cover and Income Protection insurance 

Critical illness cover and income protection insurance both offer financial support if your health is suffering, to help you manage your finances during a difficult period. Although each policy has its own features, they do share some notable similarities: 

• Peace of mind: These insurance policies protect you in a time of need, when health issues are preventing you from working. This can reduce stress when you already have a lot on your plate. 

• Flexible payments: Premium payments and payout options vary based on what you agree with your provider when you take out a plan. Payouts typically go directly to the policyholder to spend however they like.  

• Terms and conditions: Each type of insurance comes with detailed fine print. With income protection and critical illness cover there are exclusions, as you can’t claim for all conditions. You also need to think about any pre-existing conditions, as these could affect your cover options. Pre-existing conditions are health concerns where you’ve had symptoms, medication or treatment within a certain amount of time before you open a plan. Each provider and plan type can offer different set terms though, so be sure to read up on these.   

• Tax-free cover: Usually the payout you receive from income protection insurance or critical illness cover is tax-free. This might differ if your policy is provided through your employment, so it’s always best to double-check.  

In a nutshell, both types of insurance are there to financially bridge the gap when your health takes a turn for the worse and you can’t fulfil your typical work routine.  

Differences between Income Protection and Critical Illness Cover

Despite the similarities, there are defining differences between income protection insurance and critical illness cover, including: 

	Income Protection insurance	Critical Illness Cover
Payout	Pays you a percentage of your monthly income when you can’t work because of health issues. This payout can help cover your regular outgoings, such as mortgage payments.	Gives you a one-off lump sum payment. This could, for example, be used to pay off a proportion (or all) of your mortgage. Once this money is gone, you won’t receive any more payments.
Disability	Disability is generally treated the same as a recoverable illness. For the period it prevents you from working (under the terms of your policy) it should pay out. This enables you to consider rehabilitation with a potential for working in the future, if possible.	Usually pays out for permanent and total disability.
What is an ‘illness’ or ‘injury’?	Income protection insurance often broadly defines ‘illness’ and ‘injury’. In these policies, you’re typically insured (except with the exclusions already mentioned) if an illness or injury prevents you from working, whatever this may be.	Tends to be explicit, clearly stating exactly which illnesses are covered in the plan. Therefore, it may cover an illness resulting from an injury, such as blindness, but it has to be very clearly defined within the scope of the policy. For this reason, you should always read the T&Cs carefully and consider the scope of illnesses covered.
Policy length	If you want it to, income protection can continue after you make a claim, with the potential of a future claim for a different illness or injury if necessary.	Critical illness is usually a one-off payment. When you make a successful claim, this will generally be the end of the cover and you won’t be able to make any future claims.
Employed vs. self employed	Employed: Income protection can supplement or replace sick pay from an employer, providing extra financial stability during periods of ill health.  Self-employed: Self-employed people don’t receive sick pay, so income protection can be vital, serving as a primary source of income during periods when they can’t work because of health issues.	Employed: Critical illness cover provides a lump sum payment regardless of whether the policyholder’s employer offers sick pay, helping people manage financial obligations during serious illness.  Self-employed: Critical illness cover offers a vital safety net for the self-employed, as these individuals often don’t have access to employment benefits. Therefore, this cover can help with expenses like medical costs or everyday bills if you’re unable to work.
Income levels	The monthly amount you receive is calculated in proportion to your current income. You decide on the percentage of your income to cover when you take out a plan. It’s also worth considering adding inflation cover (indexation), as this ensures the amount payable increases over time in line with the cost of living.	When you take out critical illness cover, you’ll have a clear indication of the lump sum you’ll receive.

Critical Illness or Income Protection: Which is right for me? 

Before you settle on an insurance plan, it’s always wise to make sure you’ve weighed up all your options and asked the right questions: 

• Do you want cover that provides regular payments if you’re unable to work due to illness or injury, helping to replace lost income over a longer period? If so, income protection insurance could be a better fit. 

Or would you prefer insurance that pays out a one-off lump sum if you’re diagnosed with a specified serious illness, helping with immediate costs or financial commitments? If so, critical illness cover might be the right choice. 

FAQs: Everything you need to know 

Why would you need Income Protection insurance? 

Not all employers offer sick pay, and for those that do, the duration can vary. After this, Statutory Sick Pay applies, but at only £116.50 per week for a maximum of 28 weeks, this may not cover all your expenses. Unfortunately, if you’re self-employed you won’t have sick pay to fall back on. This is when income protection insurance could prove to be invaluable. To find out more about the benefits of income protection insurance, please click the link. 

Some income protection plans also come with additional benefits that may be useful to you day by day. For example, at Shepherds Friendly, members who hold an Income Protection Insurance plan with us get access to our Enhanced Benefits. This includes 24/7 access to Nuffield Health’s GP service and discounted gym memberships. 

You may not need income protection if any of the following apply: 

• You have income protection included as a work perk 

• You could survive on sick pay  

• You have a substantial amount of savings  

• You have financial support from people close to you, such as a partner 

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

What illness does Critical Illness insurance cover? 

Critical illness covers a range of conditions – these are usually long-term, serious conditions that are life-altering. The full list of illnesses or conditions that are covered by a policy depends on the insurer, but some examples may 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 any limitations. For example, some insurers will only cover you for cancer in the advanced stages. 

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. However, this is something that should be addressed in the application process. 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, permanently disabled to receive a payout. 

Does Income Protection insurance cover illnesses? 

Income protection insurance usually covers a broad range of physical and mental illnesses. This is as well as injuries, provided that you’ve been left unable to work as a result.  

Like any insurance related to health, not all conditions will be covered by every insurer and there may be exclusions that apply depending on any pre-existing illnesses you have or any hereditary conditions in your family.  

For more information, please see: what does income protection not cover?. 

How much will Income Protection cost? 

With most insurers, the cost of your premiums will depend on various factors including: 

• Your age 

• Occupation 

• Health 

• How much cover you need  

• Your chosen waiting period  

Unlike most other insurers, at Shepherds Friendly, we do not increase your premiums based on your health, hobbies or occupation. Our Income Protection premiums start from only £5 a month. You can also choose between short-term and long-term cover depending on your needs.  

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 can only claim for a set amount of time, even if you are still unable to work. 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. 

When can you claim Income Protection insurance? 

When you can claim through income protection insurance varies depending on your plan’s terms and conditions. In most cases, you won’t be able to claim immediately if you become unable to work due to illness or injury, as there’s a waiting period that needs to pass before you can make a claim. This is also called a deferred period, which 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 people who don’t receive any form of sick pay. You decide how long your deferred period is when you take out your plan. The longer the deferred period, the lower your premiums could be. 

Be sure to read through our important information and key features for more details. 

Summary 

All in all, income protection and critical illness cover are both valuable, but in different ways. Income protection provides ongoing, monthly payments if you can’t work because of your health. On the other hand, critical illness cover pays a single lump sum payment for serious health conditions specified in the policy.  

The type of insurance you opt for could be influenced by your finances, employment situation, and personal preferences. You could even consider opening both types of plans, but this would have greater costs overall, which is something to keep in mind.  

Please note: No advice has been provided by Shepherds Friendly. If you are in any doubt as to whether a plan is suitable for you, we recommend getting in touch with a financial adviser. Should you consult a financial adviser there could be a cost involved and you should confirm this cost beforehand.