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Income protection v critical illness – which do I need? - London Money

Income protection v critical illness – which do I need?

Would you rather win a multimillion-pound lump sum or a substantial regular monthly income for the next 30 years?

With the National Lottery recently introducing its ‘Set for Life’ game, players can now win £10,000 every month for 30 years, rather than the more traditional jackpot.

In terms of protecting your income, there are two products which essentially offer these options: a regular income (Income Protection) and a lump sum (Critical Illness Cover). Read on to find out more about each product and how they can be used to provide financial peace of mind.

Income Protection explained

Income Protection provides financial support if you are forced to take time off work due to injury or illness.

Typically, it covers a range of illnesses and situations that leave you unable to work. For example, it may cover you if you can’t work due to a serious heart condition, or if you’ve been in an accident and have to take time off to recover or recuperate.

Note that Income Protection typically only covers you if you’re off work due to illness or injury. It won’t pay out if you are made redundant.

Income Protection is paid as a monthly sum and is designed to cover part of your lost earnings. There will normally be an ‘excess’ or ‘deferred’ period – this is the amount of time you wait after making a claim until your cover starts paying out.

For example, if you benefit from three months’ full pay from your employer, you may choose a three-month excess period, so your Income Protection kicks in once your income stops/reduces.

Income Protection premiums are determined by factors such as:

  • Your job
  • Age
  • How much of your income you want to cover
  • The length of the excess period
  • Your health
  • How long you want your policy to pay out for

Typically, your premiums will be smaller if you choose a longer excess period.

If you’re considering Income Protection, consider the following questions:

  • Could you afford to pay your bills if you were off work due to illness or injury?
  • If you are employed, what are your sick pay arrangements? How long would you receive sick pay for, and how much?
  • If you are self-employed, how would you afford to live if you couldn’t work for any reason?

Critical Illness Cover explained

Critical Illness Cover is designed to provide financial support if you are diagnosed with one of a list of serious illnesses.

It pays out a cash lump sum if you’re diagnosed with, or undergo a medical procedure, for one of a specified list of illnesses covered under your policy. The list typically includes:

  • Cancer
  • Heart attack
  • Stroke
  • Multiple sclerosis
  • Major disability, such as the loss of a hand or foot
  • Total and permanent disability

As Critical Illness Cover provides a lump sum, you can use this to repay your mortgage or other debts, pay for private treatment, modify your home if you have a disability, or maintain your standard of living if you have to take an extended period off work.

Most Critical Illness Cover policies also include ‘children’s critical illness’. This pays a lower lump sum if one of your children is diagnosed with a condition covered under your policy.

A critical illness can happen to anyone at any age. Cancer Research say that one in two people will develop cancer at some point in their lives, while the British Heart Foundation report that there are more than 100,000 hospital admissions each year in the UK due to heart attacks – equivalent to one every five minutes.

If you can’t work due to a serious illness, this cover provides you with invaluable financial support. It means you won’t have to add money worries to your list of concerns at this highly stressful time.

Income Protection and Critical Illness Cover compared

Income Protection

Critical Illness Cover

How is the benefit paid?

Monthly, typically after a specified excess period chosen by you

As a tax-free lump sum

What does it cover?

When you are unable to perform your job due to illness or incapacity

On diagnosis of one of a list of illnesses and conditions specified under the policy

How does it work?

The policy starts paying out a monthly benefit after your chosen excess period and will continue to pay out until you are well enough to return to work or you reach the end of the policy life

The insurer will pay the sum on receipt of satisfactory evidence that you’ve been diagnosed with one of the conditions

What does it protect?

It helps you to maintain your monthly outgoings (such as mortgage and bills) during a period of incapacity

It allows you to repay debts if you’re diagnosed with a critical illness. You may want to repay your mortgage or other loans

How the two types of cover complement one another

Many people believe that they should consider Income Protection or Critical Illness Cover. However, as the two products address different risks in different ways, they can work well together.

For example, if you suffered from a bad back and were unable to work, you wouldn’t typically be covered under a Critical Illness policy. However, Income Protection may pay out in this situation.

Get in touch

Just like the National Lottery, protection is available as both a lump sum and as regular payments. If you want help finding the right cover for you, get in touch. Email enquire@london-money.co.uk or call (0207) 808 4120 to find out more.