What’s the difference between income protection and critical illness cover?

Most things about the future are quite uncertain, but insurance could smooth out some of the potential bumps in the road. If you can’t work, critical illness cover or income protection insurance could provide a financial safety net.

This guide should help you to understand the key differences.

  • Critical illness cover could provide a financial payout if you’re diagnosed with an illness or condition covered by your policy – subject to a valid claim. Conditions could include some forms of cancer, Alzheimer’s/dementia and heart disease.

    If you make a successful claim and receive a payout, this money could be a lifeline. Use it to pay for private treatment, making your home more accessible, or just to cover living expenses while you focus on your health.

    Conditions may apply to claims. For example, illnesses that were pre-existing when you took out your policy may not be covered. And you may need to live for a defined period after any new diagnosis.

    Who might need critical illness cover?

    Critical illness insurance could be reassuring for anyone to have, but particularly if you have significant and shared financial commitments. For example, if you’re the primary earner and your loved ones might struggle to manage financially if you were to fall ill and couldn’t work.

    If you have a family, you may be able to add your children to a critical illness policy, so you all benefit from the same level of cover.

    An insurer will pay out if your claim meets the conditions stated in your policy terms. This could include exclusions like previous health issues. A payout also depends on you providing accurate information at the time of application.

    With most combined life and critical illness policies, you can only claim once for either a critical illness or on the death of a policyholder. The policy is then cancelled. While separate policies may be more expensive, they allow you to claim once for a critical illness and then at time of death on a life insurance policy.

    Scottish Widows, our life insurance and critical illness specialist, paid out on 98.4% of their claims in 2022.

    Remember that life insurance products have no cash value at any time. If no valid claim is made by the end of the policy term, it will end, and you’ll get no money back. Similarly, if you don’t pay your premiums on time your cover will stop, your policy will end, and you’ll get no money back.

  • Income protection is a form of insurance that pays you a monthly tax-free amount if you can’t work due to illness or injury. Regular payments are made to you until:

    • you go back to work
    • your cover ends
    • you retire
    • you pass away

    When taking out income protection, you can select how much of your current salary you want to cover. You can also choose a deferral period. This is how long you’d like to wait before the payments start. A longer deferral period might mean your premiums are cheaper.

    Who might need income protection?

    Income protection may be suitable for anyone currently in work who would benefit from a financial safety net. Whether you have mortgage repayments to make, dependants to look after or just living costs to take care of, people of all working ages may value this form of cover.

    As with critical illness cover, an income protection policy has no cash value at any time. If you do not pay your premiums on time your cover will stop, your policy will end and you’ll get no money back.

  • To help you make an informed choice, it’s important to understand the differences between critical illness and income protection cover:

    Differences between income protection and critical illness cover

    • Inability to work vs medical diagnosis of a critical illness

    Income protection can be claimed if you’re no longer able to work. This could be because of a health condition including a critical illness, or physical injury. Critical illness cover on the other hand, involves you being formally diagnosed with a specific illness covered by your policy.

    • Lump sum or regular income

    A valid critical illness claim would give a lump sum payout. By contrast, income protection helps to cover your regular monthly earnings when you can't work.

    • Deferred payment or immediate support

    Income protection plans often feature a deferral period, set by you. This is the length of time you’re willing to wait before the first payment is received. By comparison, as soon as an insurer processes and validates a critical illness claim, the payout follows. Our critical illness specialist Scottish Widows works in partnership with Macmillan to validate cancer diagnoses. Together they have sped up the full claims process from an average of 48 to 18 days. You may even receive an early minimum payment, prior to full settlement.

    • Cost of policy

    In many cases, income protection can cost more than a critical illness policy. This is because income protection often lasts longer and includes more reasons for not being able to work. The amount of financial support is also open-ended, given that it provides cover until you either return to work or retire. Critical illness cover commonly relates to a shorter period of time where the value of a potential payout is fixed. As a result, it can cost less than income protection.

    Similarities between income protection and critical illness cover

    • Both relate to your health

    Both forms of cover come into play when you face illness, providing financial support to you and your loved ones during challenging times. Income protection is slightly different as it might also pay out if you were unable to work through injury, which critical illness insurance is unlikely to cover.

    • Both pay out during your lifetime

    Both income protection and critical illness cover are there to support you while you are alive, providing financial relief during your recovery. A payout could help cover the costs of lifestyle changes, mortgage repayments or general living costs.

  • As with other types of cover, the cost of critical illness cover and income protection can depend on various factors. When considering your application, insurers will assess a range of factors.

    For critical illness cover, these factors can include:

    • Your age.
    • Health status.
    • Medical history.
    • Lifestyle.
    • The amount of cover you want.
    • How long you want to be insured for.

    When it comes to income protection, factors affecting cost could include:

    • Your current earnings.
    • Your employment with a company.
    • The claims excess (or ‘deferral period’).
  • When making a choice between income protection or critical illness cover, you should take time to consider both you and your family’s individual circumstances and financial priorities.

    Someone looking to cover their income while they recover and eventually return to work might want to take out income protection. This would give them some continuity in earnings while they focus on getting better.

    On the other hand, critical illness insurance could offer a lump sum payment in the event you’re diagnosed with a serious condition. The proceeds could be put towards making the most of your time with the people you care about, or covering larger financial responsibilities like a mortgage or other loan.

Frequently asked questions

Frequently asked questions

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