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Policies such as critical illness cover or income protection insurance can provide a financial safety net should you need to stop work due to illness or injury.
Critical illness or income protection can help your family pay for key expenses such as utility bills, mortgages, school fees or childcare if the unexpected happens.
Yet fewer than 10% of us have one of these vital policies in place, according to figures from the Financial Conduct Authority.
In this article, we cover:
- What is income protection and why it is needed?
- The difference between life insurance and income protection
- What critical illness cover is and how it differs from income protection
- Whether health insurance is better than critical illness cover
- How to decide between critical illness cover and income protection
Related content: Is private health insurance worth it?
This article contains affiliate links that can earn us revenue*.
What is income protection insurance?
Income protection is a type of insurance product that you can take out which will provide you with a regular — usually monthly — tax-free sum to help pay your bills if you fall ill, or are injured and can no longer work.
As with all types of insurance, you tend to get what you pay for and a number of things won’t be covered at all. The best income protection and critical illness policies will make it clear exactly what is and isn’t covered in your plan.
Certain health issues have become more common since the onset of the Covid-19 pandemic. The Association of British Insurers (ABI) reports that claims for mental health conditions, for example, under income protection insurance are on the rise.
If you take out income protection insurance, you are covered until you can return to work or you decide to retire.
Policies commonly pay out between 50% and 70% of your gross (pre-tax) monthly earnings, according to figures from insurer Aviva.
You can make multiple claims while your plans are in place. You can find out much more about it in our guide to income protection insurance.
Why is income protection needed?
Most UK employees are eligible for up to 28 weeks (six months’ worth) of government-funded statutory sick pay, which amounts to a total of £116.75 per week. That figure is unlikely to cover all your bills.
Self-employed people aren’t eligible for these payments at all, leaving them to rely on savings or contemplating stressful financial decisions like remortgaging their home when they are left unable to work.
That’s the reason why individuals often seek income protection insurance as an additional safety net.
What’s the difference between life insurance and income protection?
Life insurance pays out a lump sum to your beneficiaries when you die.
Income protection is paid out in regular sums while you’re still alive but unable to work. It is a flexible type of policy that can end either after you return to paid work following illness or injury, or when you retire — whichever occurs sooner.
What is critical illness cover?
Critical illness cover pays out a lump sum if you contract one of a number of listed serious illnesses.
These funds are often used to pay a specific expense, such as credit card debt, medical costs or to pay off your mortgage.
You may need to sit down and work out how much money you family needs to survive, and for how long when comparing critical illness policies.
For example, you may choose to take out a £75,000 critical illness policy that lasts for 15 years to help with medical costs and contribute to household expenses.
Key features of critical illness cover:
- Pays out a tax-free lump sum
- Provides long-term cover that you don’t need to renew annually
- Can keep up with inflation rises through increasing cover, or…
- Can reduce as your mortgage decreases
- Ends after you receive a payout
The precise list of illnesses that insurers will cover varies between providers.
But in the main, most UK insurers offering critical illness cover will provide for you if you suffer with devastating long-term illnesses like:
- cancer
- Alzheimer’s disease
- Parkinson’s disease
- stroke
- multiple sclerosis
- organ failures
- serious heart conditions
If you want to find out more about this type of insurance policy then check out our article: Understanding critical illness cover.
Is health insurance or critical illness cover better?
It’s not always easy to distinguish between health insurance and critical illness cover. When most of us think about health insurance, we often think of private medical insurance.
These kinds of policies can cover ongoing medical costs like regular medications, dental care and eyecare. They can also cover treatments that are hard to source on the NHS, such as physiotherapy or mental health care.
According to the latest Referral to Treatment (RTT) figures for March 2024, there were over 7.5 million people in England waiting for routine hospital treatments.
As a result, more of us have been considering separate private health insurance to give us faster access to medical professionals when we need it.
But health insurance policies often won’t cover emergency treatments, or treatment for long-term chronic health conditions like diabetes, or arthritis. Find out here whether private health insurance is worth paying for.
Critical illness cover helps people get by when they are struck by a debilitating illness. It can be especially helpful when there are large bills or expenses to cover, like mortgage payments.
The one-off lump sum that such a policy provides is totally different to regular private health insurance, which will often only cover individual treatments or consultations with healthcare professionals.
If you want to read more about health insurance and whether it might be right for you, check out our article on it here.
Critical illness cover or income protection – which should I choose?
Income protection insurance pays out regular sums if you are floored by any illness or injury and cannot work. It is meant as a way to help cover common monthly bills like utilities, childcare or school fees.
Payments don’t normally start straight away, often coming with a “deferral” or “deferred” period of 4, 8, 13 or 26 weeks, depending on the provider.
Critical illness cover, pays out one single tax-free lump sum to policyholders in the event of a serious illness that may be life-threatening – like cancer, a heart attack or stroke.
The lump sum is designed to cover large expenses like medical costs, or to cover bills or pay for necessary alterations around the house.
There is no deferral period and the payout is given after diagnosis.
Insurers will have their own list of around 50 conditions that they will cover through critical illness policies.
How to decide
Considering critical illness cover vs income protection means thinking seriously about your work situation and your future.
Would you like a larger, one off lump sum to help cover large expenses like medical costs or would you like smaller, ongoing payments to help with bills and expenses?
Many life insurance policies also offer critical illness as an add-on. Just be aware that these options will likely increase your monthly premiums.
Some insurers only allow policyholders to buy critical illness cover if they also get life insurance at the same time.
But choosing one of these policies as a standalone option could be a more cost-effective option than buying as part of a wider life insurance policy.
If you decide you want to opt for income protection, you might find this tool below useful.
Income Protection, sorted
- Get free, independent advice online
- Suitable quotes from the whole market of insurers
- And help applying for cover, when you’re ready
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