Income Protection vs Critical Illness Cover


Income protection vs critical illness cover: what’s the difference, what do the policies cover and which could be better for your circumstances? Here’s a little guidance.
Nobody likes to think of unexpected illness or injuries. But if an accident or medical condition left you seriously ill or unable to work, how would you cope financially? Like everyone else you have overheads to cover: both long-term (mortgage) and short-term (utility and grocery bills). The fact is that the unexpected loss of your income – either temporarily or permanently – through illness or injury could leave you in a precarious financial position. That’s why polices like income protection and critical illness cover exist. Here’s how they compare…

Payment of claims

First of all it’s important to understand what benefits each policy would pay out in the event of a claim.
Critical illness cover pays you a tax-free lump sum if your claim is successful. This can be a sizeable payout, paid to you directly, and it’s yours to spend as you please. However you have to consider whether this lump sum is enough to secure your long-term financial wellbeing – especially if your illness leaves you permanently unable to work.
Income protection meanwhile covers a portion of your monthly income – typically between 60% and 80% of your monthly earnings – for as long as you are unable to work and is paid to you in regular instalments. Again the payout is tax-free, paid to you directly and yours to spend as you see fit.

Availability and eligibility

Achieving a meaningful level of Income protection can be problematic if your provable income does not reflect your total earnings. So if you pay yourself via dividends or rely on income from non-contractual sources, such as shift allowances or overtime, you may struggle to get an income protection policy that reflects your pay.
Critical illness cover is generally available to everybody, regardless of income or occupation.

Cost of cover

There are a huge range of factors that influence the premiums you will pay for both types of cover – including age, medical history, income and more. However as a general rule income protection tends to be the cheaper cover in terms of premium paid.

Scope of cover

Each critical illness policy has a specified list of illnesses for which you can claim. If your condition is not listed, you won’t receive a payout. This list can be quite limited in scope and – as the name suggests – only covers serious illnesses. So if you damage your back playing golf and are forced off work, you will not be covered by critical illness cover. On the other hand, if you were to suffer from a heart attack, cancer or stroke, the comfort of a lump sum may enable you to make major lifestyle changes; you may not wish to return to the career or pace of life that perhaps occasioned the heart attack in the first place.
Income protection is far more expansive in scope. If illness or injury leaves you unable to work for an extended period of time, your policy will almost certainly pay out. That means things like slipped discs and mental health issues are allowable claims, which isn’t the case with critical illness cover. You should note however that payment of benefits from an income protection plan only starts after you have been unable to work for a pre-determined period. You decide what this period will be at the beginning and this has an impact on the cost of your cover. Both products tend to exclude claims relating to alcohol, drugs, pregnancy and pre-existing medical conditions.

How many times can you claim?

Critical illness policies terminate after a lump sum payment is paid out. You can only claim once successfully. With income protection cover you can claim multiple times across the duration of your policy agreement. In short: whenever illness or injury leaves you unable to work, you can make a claim, – even if it’s for a recurrent injury or illness.

Other policy benefits

When you are off work because of illness or injury, the main thing on your mind is getting well again. That’s why many professionals benefit from the fact that several income protection policies come with a subsidised or inclusive rehab benefit. Both income protection and critical illness policies also typically offer a range of additional benefits – such as counselling, access to private GPs and discounts for healthy lifestyles.
With income protection, allowance can be made for contributions to a pension plan to ensure you continue to provide for your retirement when income from your employment has stopped.

Need some advice?

Choosing between income protection vs critical illness cover depends on your personal set of financial, professional and medical circumstances. What’s best for one person may not be best for you. And it could be that it makes financial sense to get both policies. If you would like to discuss your options please come and talk to us. We are highly experienced independent wealth management advisors. Thanks to our Charted Financial Planner status we have helped thousand of clients make smart decisions for their financial future. We can help you to prioritise your needs and ensure any policies reflect your budget. 
Nothing in this article constitutes, or is intended to constitute, financial advice. You should always seek advice from a professional financial adviser who is familiar with this type of arrangement to ensure any recommendations made are suitable to your needs and circumstances.

James Priday

This article was written by James Priday

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