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Income protection insurance vs critical illness cover: what's the difference?

Getting ill or being unable to work can be a major problem.

From losing out on business to not being able to work, your finances can suffer if you don’t have the right protection in place.

But between income protection insurance and critical illness cover, which is the better policy for you? And how do they work? 

We look at the key differences of income protection insurance vs critical illness cover below.

Summary

  • Both income protection insurance and critical illness cover offer varying levels of income support should you fall ill

  • Income protection insurance can only be claimed for the period of time that a person is not able to work

  • Critical illness cover is better suited to people looking to protect themselves against serious illness

  • It's recommended to speak to a financial adviser to find out which policies are best for you

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What is income protection insurance? 

Income protection insurance is private health insurance support that pays out a regular, monthly, tax-free sum of money if you’re unable to work and earn money.

All providers of income protection insurance offer slightly different policies and pay out different sums of money.

However, typically, you can expect income protection insurance to pay anywhere between 50% and 70% of your usual gross earnings.

This insurance scheme is designed to help you cover costs such as bills, rent and fees. 

While employees have the fallback option of statutory sick pay (SSP), this only pays out £109.40 a week for up to 28 weeks and isn’t normally enough to cover your monthly expenditures and bills.  

Moreover, self-employed workers aren’t entitled to SSP, as they don’t have an employer to pay for it.

This means that contracted workers and those who are self-employed are at much higher risk of losing their primary source of income without a way of quickly replacing it.  

What is critical illness cover? 

Critical illness cover pays out a lump sum if you are diagnosed with a serious illness or injury.

Normally, this lump sum helps you keep up with any major financial costs, such as mortgages or credit card debt.

However, unlike income protection insurance, critical illness cover only pays out if you fall ill with an agreed serious illness or injury.

Normally this includes but isn’t limited to: 

  • Cancer 
  • Alzheimer’s disease 
  • Parkinson’s disease 
  • Stroke 
  • Multiple sclerosis 
  • Organ failure 
  • Serious heart conditions 
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What's the difference between income protection insurance and critical illness insurance? 

Both income protection insurance and critical illness cover offer varying levels of income support should you fall ill.

But with both offering different targeted support, it’s important to understand how the policies differ and what they are best used for. 

Income protection insurance can only be claimed for the period of time that a person is not able to work.

So if you aren’t able to work for two months, you could receive two months’ worth of fixed payments to replace your lost income.

However, it can take anywhere from four weeks to 26 weeks to start receiving your payments, so it won’t provide an immediate cash boost.  

And, for employees whose employers offer more comprehensive sick pay support, it may not even be worth taking out income protection.

Although SSP provides minimum sick pay, many employers offer their own workplace sick pay schemes that may offer better weekly and monthly payments than income protection and SSNP.

So, be sure to check with your employer if you are entitled to a workplace scheme. 

Critical illness cover, on the other hand, is better suited to people looking to protect themselves against serious illness.

As critical illness cover only pays out a lump sum to help you keep up with essential costs and treatments, it’s not the sort of cover that you can use as a more generalised top-up to your income.

For this reason, critical illness cover is better suited to people who, should they lose their primary source of income, would fall behind on large financial payments.  

Income protection vs critical illness: which is better for you? 

Whether or not you should be looking to take out income protection insurance or critical illness insurance ultimately comes down to your individual circumstances, including your age, occupation and health, as well as your budget.  

As a general rule, you’re more likely to make a claim on income protection, which means that although your premiums for income protection will likely be more affordable at first, they could increase over time.

Moreover, with income protection insurance potentially not paying out for a number of weeks, you won’t receive an immediate cash boost when you fall ill.

But if all you need is a set, regular payout that helps you pay bills and expenses, income protection insurance is a relatively affordable insurance policy.

You may even be eligible for employer-provided income protection, or group income protection, which is also provided by your employer.

Generally, these come as part of a wider employee benefits package, so it’s worth exploring whether this is something that your employer offers.  

In contrast, critical illness cover is slightly more expensive, but will see you immediately receive a sizable cash boost upon a successful claim.

This could be invaluable if your serious injury means you will no longer be able to keep up with sizable payments, such as mortgage and credit card debt.

For that reason, if a sizable loss to your income could see you potentially fall behind on major expenses, critical illness cover may be a better option for you.  

You could also choose to take out both insurance policies. While this is likely to be the most expensive option, it will also offer you the greatest level of income protection should you fall ill.  

Becoming ill and not being able to work can blow a big hole in your finances.

While critical illness cover and income protection insurance offer different levels of coverage, it’s vital to speak to a financial adviser to find out which policies are best for you.

Find a qualified financial adviser with Unbiased today.  

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About the author
Kate has written for leading publications and blue chip companies over the last 20 years.