Life insurance and income protection insurance are protection plans designed with financial security in mind, but in different ways. Life insurance ensures your loved ones are protected when you die, whilst income protection insurance is a lifeline if you can’t work due to illness or injury.
Which type of insurance would suit you best? Read on to find out more as we compare the key differences between the two types of insurance. With this information, you can get a better idea of the purpose of each policy and how they work.
Understanding Life and Income Protection Insurance
Life insurance and income protection insurance have several qualities that set them apart. One of the main distinctions is how the payout works. With life insurance, this goes to the policyholder’s family or loved ones when the person who took the plan out dies, whilst income protection pays the policyholder directly. Income protection covers a percentage of your wage, so if you have a health issue that prevents you from working, you can still receive a steady income.
With both forms of cover, the payout amount is agreed upon when the plan is opened. So, you agree to a monthly premium and payout based on how much you pay. In the case of income protection, you choose a percentage of your income to cover, and the premium aligns with this amount.
Knowing the ins and outs of what each type of insurance covers will help you decide which is better for you based on your circumstances.
What is Life Insurance?
Life insurance cover protects the people closest to you, as when you die, it provides them with a sum of money. This is called a ‘sum assured’ and it can go towards your end-of-life costs, such as funeral plans, debts (including paying off a mortgage) or general living expenses to help your beneficiaries during a difficult time. A plan is active through regular premium payments that you agree to when you take out a policy.
Typically, the application process involves a quote, where you decide how much money you’d like to pay (usually in monthly premiums) and what your payout amount will be based on this. In some cases, if you see a favourable rate, it can be more cost-effective to take a plan out sooner rather than later to get a better deal in the long run. Premium payments generally increase as you age, but if you start paying whilst you’re younger you can lock in a better rate, depending on the terms and conditions of your plan.
As mentioned, the main purpose of life insurance is to give policyholders peace of mind that the people closest to them will have a financial safety net when they’re no longer around. This can be especially important for people who have children or partners who are financially dependent on them. Some life insurance providers even pay out directly to policyholders who receive a terminal illness diagnosis whilst their plan is active.
If you’re considering life insurance, there are various aspects to think about before you open a plan, including:
- Premium payments
- Payout amount
- Age and health implications
- Extra benefits the plan offers
- Type of life insurance e.g. term life insurance, Over 50s Life Insurance etc.
- Terms and conditions
Who should have Life Insurance?
Life insurance is vital for anyone with loved ones that depend on them financially. It’s also suitable for those without significant savings who wish to leave money behind for the people that matter most.
With life insurance, the people closest to you have a financial safety net in place when you die. The cash lump sum they receive from the payout can help them with funeral costs, outstanding mortgage costs, or give them something extra towards general living costs whilst grieving.
There are also specialised types of life insurance for you to consider, which could provide more favourable rates and benefits. For instance, there are age-specific plans, like Over 50s Life Insurance, and some that offer added perks when you open a plan or are an existing policyholder.
You might be thinking ‘is over 50s life insurance worth it’? In short, this depends on your situation. If you fit the requirements and have people in your life that you look after financially, or you want to leave your nearest and dearest some money behind, then it is worth it. It offers the people you care about support when you no longer can. However, if you don’t have dependents or need this type of coverage, income protection might be a better fit if you’re still working and want added financial security.
What is Income Protection Insurance?
Income Protection Insurance replaces a percentage of your income if you can’t work due to illness or injury. Similarly to life insurance, you pay regular premiums to keep your plan active. This ensures that if anything unexpected impacts your health to the point where you can’t work, you’ll still have a tax-free income. The amount you receive is typically 50-70% of your pre-tax salary, but it can vary depending on your policy and the rate of cover you choose.
If you can’t work, Income Protection Insurance will cover you until you recover, reach retirement age, or your policy ends. It’s designed to provide you with a lifeline should your health take a turn whilst you’re employed, but it doesn’t carry any cash value outside of your cover – therefore, it doesn’t offer a payout if you retire.
There are various things to keep in mind when you cover your income. You need to familiarise yourself with the terms you want and need. For example, some policies only cover certain illnesses or injuries. Policies and providers also offer different deferred periods (also known as a ‘waiting period’), so consider how long your sick pay at work covers you. There’s also short-term and long-term options, and ranges of pricing that can be impacted by factors like lifestyle, age, and the current status of your health.
This insurance gives you peace of mind by ensuring financial stability if your health impacts your ability to work.
Who should have Income Protection?
Income protection can benefit anyone who relies on their income to maintain their lifestyle, especially if unexpected health issues suddenly stop them from working.
This type of cover suits:
- Workers with limited sick pay
Some workplaces only offer the minimum statutory sick pay which is £116.75 for 28 weeks. After this, payments stop, which is a worrying prospect if you’re running a household.
- The main providers at home
This can be especially important for individuals who have a family to look after and no other streams of income.
- Anyone with ongoing monthly bills or debt
Most of us rely on our income for ongoing costs, so without this coming in, it could cause a lot of problems.
- People without substantial savings
It’s recommended that you have savings equivalent to 3-6 months of your wage to survive any unpredicted emergencies. Many people don’t have this in place, which is where income protection insurance can help bridge the gap.
If you have loved ones who depend on your financial contributions, this type of policy can offer peace of mind that you’ll still be able to support them if you’re ever unable to work.
What are the differences between Life Insurance and Income Protection?
The main differences with life insurance and income protection insurance are what they cover and how the payout works, which we have laid out here:
| Life Insurance | Income Protection | |
| What is it? | An insurance policy that pays out to the policyholder’s loved ones when they die | An insurance policy that covers part of the policyholder’s income if they are unable to work, paying out to the policyholder |
| What do you get? | Pays a lump sum to chosen beneficiaries when the policyholder dies, or sometimes even directly to the policyholder if they are diagnosed with a terminal illness | Pays 50-70% of the policyholder’s income in tax-free monthly payouts if they are unable to work due to illness or injury |
| Who is it for? | Anyone with financial dependents or loved ones they want to leave money behind to | Anyone who works and relies on their income to pay the bills, or workers who have financial dependents |
There are also similarities between these two types of insurance:
- They’re typically both active through agreed monthly premiums with set payouts.
- Policyholders or beneficiaries need to make a claim to receive the payout, which is standard for most insurance policies.
- Both policies are usually long-term commitments, designed to provide financial security to policyholders and their families should something bad happen.
How do I decide which policy is right for me?
When weighing up life insurance vs income protection, consider the following:
- Do you have dependents who rely on your income?
- Are you concerned about how your loved ones would pay for general costs like an outstanding mortgage, or even your funeral, if you were no longer around?
- What is your family’s financial situation? Do you have savings in place?
- How much cover would you need for lost income if you had to stop working due to illness or injury?
- What is your budget for premium payments?
By taking these questions into account, you can see what insurance plans are available and make an informed decision on which suit your needs.
Does it make sense to have both Life Insurance and Income Protection?
It can make sense to have life insurance and income protection but it depends on your situation. Whilst the two different policies protect you from distinct risks, they both share the same aim: financial protection. The main thing separating them is how the payouts work, as life insurance offers a lump sum payout to the policyholder’s loved ones when they die, and income protection payouts are often ongoing and are received by the policyholder.
Life Insurance vs Income Protection
By having both types of insurance in place, you’re protecting yourself and your family from a range of possibilities. However, this comes at a higher cost in the short term, so it may be better for you to choose whichever one is more suitable. Some income protection policies even include a level of bereavement cover – Shepherds Friendly’s Income Protection Insurance offers up to £6,000 to family members if you die whilst your policy is active.
It’s always worth weighing up your options, putting in research and figuring out what is most suitable for you and your family.
Which policies do Shepherds Friendly Offer?
We offer Over 50s Life Insurance and Income Protection. These options are designed to provide security for you and the people closest to you, so that you always have a reliable plan in place for whatever life has in store.
Our Over 50s Life Insurance:
- Voted ‘Best Over 50s Life Insurance Provider’ in 2024 and 2025 by YourMoney.com
- 5 Star Defaqto rated
- Free cover after 30 years or by age 90, whichever comes first
- Up to £250 Co-op Funeral Benefit Option
Our Income Protection insurance:
- Cover up to 70% of your income
- Premium payments starting from only £5 a month
- Free Enhanced Benefits: a 24/7 virtual GP service and a 20% discount on Nuffield Health gym membership
Final thoughts
Both life insurance and income protection insurance offer financial support, just in different scenarios. Life insurance is necessary if you want to leave extra money behind for your loved ones after you pass away, whilst income protection insurance covers a percentage of your wage if bad health stops you working.
Deciding which plan – or if you want to take out both – depends on your needs, financial responsibilities, and situation. Take the time to assess your options to get the right protection in place going forward.
If you want to speak to our team for more information, then please reach out or explore the Shepherds Friendly blog.
No financial advice has been given by Shepherds Friendly. If you would like financial advice, please speak to a financial adviser.
