In this article I’m going to be looking at Income Protection And Critical Illness Cover. You may be asking yourself “What are the differences between Income Protection And Critical Illness Cover?” And which type of policy should you have? Both insurances are designed to help you out financially if you become ill, but which is better? There’s only one way to find out – FIGHT!!!!
If we’re going to look at the differences between these two types of policy, it makes sense to first look at the similarities, because this is often the reason people get confused:
What’s The Same?
- Spend It How You Like – With either of these two policies, in the event of a pay out, there are no conditions on how you spend your money – to cover your bills and mortgage while you are unable to work, take the family on holiday, or buy a motorbike, it really is yours to spend however you see fit. (just so you know, I recommend option one…unless it’s a really cool bike).
- Tax Free – A pay out on either an Income Protection or Critical Illness policy is tax-free; UNLESS the policy is part of the benefits package offered by your employer, in which case it will be taxed as part of your normal income.
- There Are Similar Exclusions – Both these types of policy will have exclusions in place that mean under certain circumstances they won’t pay out; for example if an illness occurs because of a pre-existing condition that you were aware of when you took out the policy.
It’s easy to see why it can be confusing when it comes to deciding which type of cover will be most beneficial, after all, all the important bits match up – tax-free cash that you can spend however you want, paid out if you become too ill. Obviously, there must be differences, otherwise there wouldn’t be two different policies, and I wouldn’t need to be writing this article. Let’s take a look at what they are:
- The Way It’s Paid Out – With Critical Illness cover your pay out will be in the form of a one-off lump sum of money, handy if you want to pay off a chunk, or all of your mortgage, or if you want to go and buy that motorbike outright. However, once that cash is gone, it’s gone, so spend it wisely! Income Protection will give you a monthly payment for as long as you are unable to work, making sure you can keep up with commitments such as monthly mortgage payments and bills, or pay for that bike in instalments. This can be helpful for budgeting, particularly if you’re hoping to be back at work in a couple of months and so don’t have the financial worry of needing to pay a huge lump of mortgage off in one go.
- Disability – An Income Protection policy treats disability as a recoverable illness, and so will pay out monthly for as long as it keeps you out of work, and even if recovery is probable. This allows you to think about rehabilitation and the possibility of returning to work at some point in the future. Critical Illness cover is different in that it will pay out if your disability is permanent and there is no chance of recovery.
- What Counts As An Illness or Injury – Critical Illness cover is very clear on exactly which illnesses are covered within the policy, so it’s important to read the policy carefully to see the scope of illnesses covered. A key point to note here, no Critical Illness policy requires you to be out of work for you to make a claim, it will pay out when your illness reaches a critical point… working or not. An Income Protection policy will cover any illness or injury stopping you from working. So, no specific list of conditions. Just one simple rule. Again, this is helpful to bridge a short-term gap if you are looking at returning to work in the not-too-distant future.
- Policy Length – If you make a successful claim against your Critical Illness policy that is generally the end of your cover and you can make no future claims against the same policy. Income Protection works differently in that if you make one claim, you can continue with your cover and make a future claim against the same or different illness or injury.
- The Self-Employed – Those who are self-employed can take out either type of policy, but Income Protection is generally favoured as it acts as a safety net for your livelihood and income in the same way that a lot of employed people are protected through their company’s sick pay schemes; by giving you a monthly payment for an agreed amount of time until you can work again.
- The Amount Of Money You Can Expect – When you take out Critical Illness policy you can insure yourself for however much you want as long as you can afford the premiums… yes even £1 million, however with Income Protection, you can only insure yourself for around 60% of your Gross yearly income.
So, as you can see, when it comes to a fight between Income Protection And Critical Illness Cover, there isn’t really a clear winner. It all comes down to which type of policy will best suit your needs, such as whether or not you have a mortgage, or whether you are self-employed.
If you would like a quote, or if you have any insurance-related questions please do get in touch. Our advice is free, and one of our qualified advisors would be more than happy to help.
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