Critical Illness Cover vs. Income Protection

Podcast approved by The Openwork Partnership on 15/7/2024

What is critical illness cover and what’s covered by this insurance?

Critical illness cover is there to take away the financial burden of a serious illness, by paying for things like treatment and recovery or home adaptations. You could also use it to treat your family or even pay down some of your mortgage.

It can be a lifeline when you’re seriously sick. It’s paid out as a lump sum should you develop one of the specific medical conditions listed in the policy. Some plans might only cover 30 conditions while others cover more than 100.

Most plans only pay out once and then the policy ends, but there are genuinely so many different critical illness plans available on the market. No two are the same, even if they look like they cover the same thing.

How much critical illness cover do I need?

It’s all about your personal circumstances, and an advisor would work with you to find the right plan and benefit amount to fit your needs.

How does income protection work?

Income protection is almost like a private sick pay plan. If you can’t work due to an accident, illness or injury you’re going to get a monthly salary until you’re well enough to return to work.

While your policy ends after you claim on a critical illness plan, an income protection plan doesn’t end once you claim. If you need to claim again, you could and there’s no increase in cost, either. If you claim, your policy will just continue as normal at the same price.

Most people rely on their income to pay the monthly bills and put some savings away over the short, medium and long term. It helps grow your pension as well. So it really is one of the most important elements in the survival of a household. If you can’t work, what would you do?

If you’re employed, do you have any company sick pay? Do you have any savings you could use? For a lot of people, that might get you by for the first six months. But what would the next 12 to 36 months look like if you couldn’t work?

Many people would struggle just to even keep on top of their monthly outgoings. There could be a serious drop in living standards, especially with statutory sick pay currently at £116.75 a week. For most people, that wouldn’t allow them to survive every month.

What does income protection not cover?

It generally won’t cover loss of income due to injury caused by self-harm. Certain pre-existing medical conditions may be excluded, but that would be specific to your application.

Also, it doesn’t cover the inability to work for non-medical reasons like redundancy, for example.

How much income protection do I need?

Again, that’s going to be specific to your circumstances. As a bare minimum you need to be able to pay the bills and afford to live every month. A budget planner is absolutely essential.

You need to be able to forecast your outgoings – that gives you a good idea of what level of income is actually required.

How does critical illness cover differ from income protection? What are the pros and cons of each?

With income protection, the biggest difference and advantage is that there’s no list of conditions. With critical illness cover you have to have a listed condition to get paid out.

Income protection is a lot more flexible. Any accident, illness or injury that prevents you from working, where you’re signed off by your doctor, will constitute a claim. Also, the
monthly payouts are tax free and you could make multiple claims. The plan won’t end or change just because you’ve made a claim. Right up until the end of the policy, you could claim on it multiple times.

In terms of the drawbacks, obviously existing medical conditions may be excluded and income protection won’t cover your full income. If you’re earning £2,000 a month, you can’t insure yourself for £2,000 a month because there would be no incentive to get back to work. Generally around 65% of your gross income is what a provider would pay out for you.

With critical illness cover, you’re getting that lump sum of money. If you become seriously ill, the additional, hidden costs that come along with that could be staggering. It will obviously depend on what you suffer from – and that’s where that lump sum is so vital.

It gives you the option to look at different treatments, home adaptations or to treat your family etc. So income protection is great to take care of the monthly bills and the day-to-day things. But if something serious happens to you, that lump sum of money could really make a difference.

With critical illness cover there’s that list of conditions that you need to meet to be paid out. It won’t generally cover less serious injuries, and once you do claim on that plan, the policy will end.

With both critical illness cover and income protection, insurers pay out on around 95% of claims, so it is really again specific to your needs. You may need one or both of these things – it’s completely down to your personal circumstances.

Can you combine critical illness cover and income protection?

They can’t be combined in one plan, but you could apply for both together using one application form with the same provider. Again, that’s something that an advisor could help you with, in terms of applying for and setting up these policies.

How can a broker help? Is there anything else we need to know?

Insurance is a particularly complex area. When you’re talking about insuring your life, your family or your business, it’s extremely important that it’s set up correctly and meets your needs.

Plus, you want to be reviewing that on a regular basis. Your life changes regularly, so you want to ensure that your protection matches up accurately to your needs. There are absolutely no fees for a client for insurance advice.

Approved by The Openwork Partnership on 15/7/2024.