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Life insurance vs critical illness cover: What’s the difference?

None of us likes to dwell on the possibility of dying unexpectedly or contracting an illness that stops us from working.

But neither do we want to face the prospect of leaving our family without financial security if the worst should happen.

This is where life insurance and critical illness cover can provide genuine peace of mind – and protection. 

Here we explore the features and differences between life insurance and critical illness insurance, and whether you should consider combining both products. 

Summary 

  • The main difference is that life assurance pays out if you die, whereas critical illness cover pays out if you fall ill.

  • Life insurance and critical illness cover can be taken out at the same time.

  • Critical illness cover is usually more expensive than life insurance.

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What is life insurance?  

Life insurance helps to protect your family. It pays out a sum of money if you – the insured person – die.

Your beneficiaries can then use the money to cover bills, mortgage payments, childcare costs and of course, funeral costs.  

There are essentially three types of life insurance: 

  • Level term life insurance: Here the amount of financial coverage stays the same throughout the term of the policy 

  • Decreasing term life insurance. This is useful for covering a debt that gets smaller over time, such as mortgage repayments. The amount of cover gets smaller during the term of the policy 

  • Increasing term life insurance. With this type of policy, the cover increases over time. It means that your beneficiaries can make the most of their money, because payments keep pace with inflation 

What is critical illness cover? 

Critical illness cover pays out a lump sum if you’re diagnosed with a critical illness or permanent disability that’s covered in your chosen plan.

The amount of cover is up to you, and you can choose how it’s paid out. You can often take out critical illness cover with your partner as well. 

At a time when you need to concentrate on recovering, or you’re adapting to life-changing circumstances, critical illness cover can really lighten the burden by providing financial security. 

What are the key differences between life insurance and critical illness cover? 

At a glance, life insurance and critical illness cover basically do the same job, by providing a tax-free lump sum or income for your dependents should you be unable to provide for them anymore. 

The main difference is that life assurance pays out if you die, whereas critical illness cover pays out if you fall ill and are suffering from one of the conditions covered in your policy. 

Here are some of the key features and differences between life insurance and critical illness cover, to help you decide what will work best for you. 

Life insurance is:

  • Great if you have financial dependants 

  • Frequently used to cover mortgage payments 

  • Used to settle funeral costs 

  • Useful if you’d like to give a financial gift to a loved one 

Critical illness cover can:

  • Be good even if you have no one financially dependent on you 

  • Provide you with much-needed financial freedom if you become ill 

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Can you take out both kinds of cover? 

Yes, you can. In fact, a lot of critical illness policies are bought with life insurance. This means that they’re basically one product, and will pay your cover amount either if you die or become very ill.

Naturally in this situation the policy only makes one payment – so if you receive money through critical illness it won’t then pay out again in the event of your death. 

You can also choose to buy the two policies separately, and this is a good idea if you would like some extra flexibility.

You might like some life insurance to cover mortgage payments if you die, but also a small amount of critical illness cover to top up your family’s income for a few months if you were to fall ill.

It’s easier to personalise your cover in this way when you buy policies separately. 

Learn more: can I have more than one life insurance policy?

How do the costs of life insurance and critical illness cover compare? 

You’ll find that critical illness cover is usually more expensive than life insurance. The reason is because you’re more likely to claim on this kind of policy.  

There are ways to cut the cost of critical illness cover.

Here are some top tips: 

  • Reduce the amount of cover or the length of time you’re covered for 

  • Quit smoking and make healthy improvements to your lifestyle – this can reduce the cost of life insurance too 

  • Do plenty of research – there are lots of critical illness products available.  

  • Talk to an expert financial adviser – they know the market and can point you towards good-value options that match your personal needs 

Choosing the right cover for you and your family is a very big decision.

That’s why it pays to understand how life insurance and critical illness cover work, how they’re different and why it could be a good idea to invest in both. 

As with every important financial move, it can also be a sound idea to consult a professional adviser before making your final choice. 

If you found this article helpful you might also find our article on the differences between income protection insurance and critical illness cover here. 

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