Income Protection or Critical Illness cover? What you need to know

In recent weeks and months, our TV screens have been full of tragic stories about the millions of people affected by coronavirus around the world.

During lockdown, you have probably paused to think about whether you have the right protection in place, and what you and your family would do if you were unable to work due to ill health.

If you want the peace of mind of knowing that you’re protected, Income Protection and Critical Illness cover are two of the most common types of policy available. But what do they do? How are they different? And which one might be right for you?

Introducing Critical Illness cover and Income Protection

Critical Illness cover provides a tax-free lump sum when you are diagnosed with one of a list of illnesses covered under the policy.

Income Protection insurance is designed to replace a portion of your income if you are unable to work due to ill health or an accident. It is paid to you as a monthly income.

  • They both provide protection in the event of illness. You will receive a certain amount if you become ill
  • Payments in each case are made to you and you can use the funds for whatever purpose you like – for example, to pay your mortgage, rent, and bills
  • Critical Illness and Income Protection payouts are tax-free (except in cases where the Income Protection insurance is part of an employer scheme. In this case, payments are treated as income and taxed as normal)
  • Both types of cover generally exclude pre-existing conditions or illnesses arising from alcohol and drugs.


Critical Illness

Critical Illness is designed to provide a lump sum if you’re diagnosed with one of a list of illnesses covered under your policy. Conditions that are commonly covered include heart attack, most cancers, stroke, and multiple sclerosis.

The insurer will pay a lump sum once you are diagnosed with a condition that your policy covers. You could use this money to repay your mortgage, cover monthly bills and commitments, pay for medical care, or adapt your home.

The insurer won’t pay out for any illness not covered by your policy. This may include mild versions of diseases, so you may not get a payout for some less serious cancers or a mild heart attack.

Once your policy pays out, it stops. So, you can only claim once on this type of cover.

Income Protection

Unlike Critical Illness cover which pays a lump sum, Income Protection pays a monthly amount to you to replace lost income in the event you can’t work due to illness or injury.

Typically, you can cover up to around 60% of your salary. Income Protection also has an ‘excess’ period – typically between four and 16 weeks – before you receive any benefit. So, if you choose an eight-week excess period, you will have to be off work for at least eight weeks before your cover will start to pay out.

Your claim will typically be paid for a fixed period. This is ordinarily six to 12 months, depending on your policy.

While Critical Illness cover pays out if you’re diagnosed with one of a specified number of conditions, Income Protection is designed to pay out when illness or injury prevents you from working. This means that it covers practically any medical condition, as long as you cannot work due to the condition.

Why the two types of protection are complementary

While the two types of protection may seem to be similar, they actually differ in a number of important ways. For example:

  • Critical Illness pays a lump sum, while Income Protection pays an income
  • Critical Illness is restricted to a list of specified conditions, while Income Protection can cover a wide range of illnesses/injuries
  • Critical Illness will pay out once, while you can potentially make multiple claims under an Income Protection policy.

Many clients ask: “If I have Critical Illness, why would I need Income Protection?”

One of the reasons is to look at the most common claims made under an Income Protection policy. These are:

  • Accident
  • Musculoskeletal
  • Psychological (mental health issues such as stress and depression)
  • Cancer

Of these four common conditions, only cancer would typically be covered under a Critical Illness policy.

So, if you were off work for an extended period because of a car accident, you broke a limb, or you suffered with stress or depression, you would not normally be able to make a claim under a Critical Illness policy.

In these instances, could you continue to meet your monthly commitments? What sick pay would you receive?

And what if you are self-employed? Would you have any income at all if you were unable to work?

Mark Jones from insurer LV= says: “Critical Illness cover will pay out if a client suffers a serious illness; if it’s an accelerated product it also pays out on death.

“If a client is unable to work but not as a result of a critical illness, e.g. they break their leg or suffer a back injury, without an Income Protection policy in place, they could find themselves in a financially vulnerable position.”

The other issue to consider is this. If you have Critical Illness cover in place and you receive a payout as you are seriously ill, you may receive a lump sum sufficient to pay off your mortgage. However, there may not be much point paying off the mortgage if you can’t then afford to live in the house.

This is where Income Protection can be hugely beneficial, as it will help to replace lost income while you are recovering.

Get in touch

Taking out the right protection gives you the peace of mind that you will have money available if you’re unable to work through illness or injury. It means there is one less thing to worry about at an already stressful time.

We can help find the right protection for your needs, at the right price. Email enquire@london-money.co.uk or call (0207) 808 4120 to find out more.