Critical illness cover vs income protection

Jun 28, 2023 | Protection

While almost every homeowner has house insurance, and all drivers should have car insurance, recent research shows that only 7% of UK adults have critical illness cover or income protection.

A lack of general awareness about this cover could be the culprit. So if you’re considering personal protection insurance, it’s important to understand the key differences between critical illness cover (CIC) vs income protection (IP).

Both are designed to offer you financial support after an unexpected injury or sickness. But despite this top-line similarity, these two types of policy are by no means the same. They offer different levels of cover, provide different payouts, and their terms and conditions vary too. Let’s dive into the details.

What is critical illness cover?

Simply put, CIC is insurance that pays out a tax-free lump sum if you’re diagnosed with an illness that’s specifically named in the terms of the policy.

It’s largely dependent on the provider, but most CIC policies cover up to 50+ critical illnesses, with the three main categories being cancer, heart conditions and strokes.

The cost of the policy is usually calculated on factors like the length of the cover, the monetary amount, age, occupation, and lifestyle, as well as any pre-existing medical conditions.

Once you’ve successfully claimed on your critical illness cover, the policy ends. It’s worth noting that a CIC payout won’t impact any life insurance policies you may have at the time.

Benefits of critical illness cover

Let’s look at the core benefits for this type of personal protection insurance:

  • You don’t pay tax on the lump sum.
  • The larger payout could cover your mortgage, rent or even medical bills.
  • Certain policies will also pay out if your children are ill.
  • You can sometimes make a partial claim for less severe illnesses.
  • You keep the whole payout, regardless of how soon you’re back at work.

What is income protection?

Income protection is sometimes referred to as permanent health insurance, or sick pay insurance. That’s because – where CIC pays the claimant a single lump sum – IP is designed to provide regular, monthly income replacement for anyone experiencing an illness that leaves them unable to work.

IP can generally pay out anywhere from 50-70% of your gross annual income, giving you the peace of mind that comes with long-term income security.

The cost of an income protection policy depends on your health, how fast you’re likely to need a pay-out, and the type of job you do. For example, the riskier your occupation, the more expensive the premium; and loss of income from any underlying medical conditions is likely to be excluded from a payout.

Keep in mind that every policy has a specific definition of what it means to be “incapacitated”. So if you are making an IP claim, you’ll be required to prove that your circumstances meet those criteria.

Benefits of income protection

By contrast, the core benefits of income protection policies are:

  • You’re continually supported by regular monthly payments.
  • It’s better than statutory sick pay.
  • It covers between 50-70% of your gross annual income.
  • Some policies last through to retirement if necessary.

Critical illness cover vs income protection: the key takeaways

When you look at CIC and IP side by side, the payout itself is the biggest point of difference. If you fall ill, the lump sum from a successful claim on critical illness cover gives you an immediate financial boost, assuming the illness is specified in the terms and conditions.

By contrast, successfully claiming on an income protection policy grants you access to regular payments, but these cease as soon as you’re able to go back to work. So you may receive less financial support overall than CIC provides.

Yet taking out an IP policy is often less expensive in terms of monthly premiums than CIC, which could make it a more appealing option for anyone looking at lower cost protection.

So, when you’re choosing the right personal protection insurance, you should consider factors like your budget, outgoings, the risk level of your occupation and your medical history to determine which is right for you – some insurers even make a case for having both policies.

We’d love to answer any questions you may have. So if you want to find out more, please ask.