Income Protection vs Critical Illness Cover: What’s the Difference?
Income protection and critical illness cover are both designed to provide financial support if your health takes a turn for the worse, but they work in very different ways.
Critical Illness Cover is designed to pay a lump sum if you are diagnosed with one of the serious illnesses covered by your policy and you meet the insurer’s definition for that condition. Depending on the amount of cover you have, that money could be used to repay or reduce your mortgage, cover household bills, help with treatment costs or simply give you some financial breathing space while you recover.
Income Protection works differently. Instead of paying a one-off lump sum following the diagnosis of a specified illness, it is designed to provide a regular monthly income if illness or injury means you are unable to work. The benefit normally starts after an agreed deferred period, which can often be matched to any sick pay you receive from your employer.
You do not necessarily have to suffer from a major critical illness to be unable to work for a long period of time. Back problems, musculoskeletal conditions, mental health conditions and many other illnesses could potentially leave someone unable to work without resulting in a claim under a critical illness policy.
That is why the two types of cover should not always be looked at as an either/or decision. They are designed to deal with different financial problems.
Critical illness cover can provide a large lump sum at a difficult time. Income protection can help replace some of the monthly income you would normally rely on to pay your everyday bills and commitments.
A Good Time to Review Your Protection
If you are a first-time buyer, buying your first property is the ideal time to put your protection in place. You are taking on what is likely to be one of the biggest financial commitments you have ever had, so it makes sense to think about what would happen if your income suddenly stopped.
The same applies if you are moving home. Your mortgage may be increasing, your monthly commitments may have changed and your existing protection may no longer match your circumstances.
If you are remortgaging, it can also be a good opportunity to review any protection you already have. Your mortgage balance, income, family circumstances and financial commitments may all be very different from when the original policy was arranged.
Protection should not simply be something that is put in place once and forgotten about. As your circumstances change, it is worth checking whether the cover you have would still do the job you expect it to do.
What Happens if One Policy Excludes an Illness?
One of the biggest reasons to consider both critical illness cover and income protection is that one policy may still provide support where the other does not.
This can become particularly important if you have previous medical history or a family history of certain illnesses.
In some cases, an insurer may exclude a particular illness or group of illnesses from critical illness cover. That could mean you would not receive a critical illness payout for that condition, even if it later became a serious health problem.
Income protection is underwritten separately.
So even where a particular illness has been excluded from critical illness cover, income protection may still provide some cover if that illness later prevents you from working, provided the condition has not also been excluded under the income protection policy and the claim meets the insurer’s definition of incapacity.
That is an important distinction. An exclusion on one type of policy does not automatically mean the same exclusion will apply to another.
Why Income Protection and Critical Illness Cover Can Work Better Together
Critical illness cover can provide a lump sum at a difficult time. That money could be used to reduce debt, repay part of a mortgage or help deal with a major change in circumstances.
Income protection can provide an ongoing monthly benefit to help replace some of the income you have lost while you are unable to work.
Even if part of your mortgage was repaid following a critical illness claim, you would still have everyday costs such as food, council tax, energy bills, transport, childcare, insurance and other household commitments.
That is why I often look at protection as a combination rather than one single product.
The right solution will depend on your income, mortgage, savings, employer sick pay, existing protection, family circumstances and medical history.
Someone with strong employer sick pay may need a different income protection structure from someone with very limited sick pay. Someone with significant savings may also have more flexibility than someone with very little emergency money available.
How Likely Are You to Need Protection?
It can sometimes be difficult to imagine becoming seriously ill or being unable to work, particularly when you are fit and healthy today. Looking at the potential financial impact and understanding the risks can help put protection into perspective.
Critical illness cover can help protect you against the financial impact of a serious diagnosis. Income protection can help protect the income you rely on if illness or injury means you cannot work.
Having both can therefore provide a broader level of protection and reduce the risk of being left with a gap just when you need financial support most.
For further independent information on how income protection works and when it may be useful, you can read the MoneyHelper guide to income protection insurance. Here is the MoneyHelper guide to critical illness cover.
