Income Protection vs Critical Illness Cover: How to choose a backup plan | Health
Uh-oh! Didn’t see that coming! Thankfully, if you sort out income protection insurance or critical illness cover, you don’t have to panic when life knocks you off your feet. So what do you need?
Excuse us for sounding like one of those cheesy adverts but... what would happen if you have an accident or illness that left you unable to work? Say you were kept in hospital for a month or two, or break a leg and can’t get to the office, or have a mental health crisis. Unable to work, your income could be severely compromised. Savings might take some of the strain, but it’s not an ideal situation.
Really, the best thing to do is plan ahead and get yourself some insurance – something only 10% of UK adults have in place.
So what are your options? To protect your earnings and everything that depends on them, you could take out Critical Illness Cover or Income Protection Insurance. Or both. These are both a type of insurance cover but there are big differences between the two, including how they pay out and what you can claim for, so let’s take a look and see which suits you best.
Comparing the options: income protection vs critical illness
What is critical illness cover?
A financial safety net that pays a one-off sum when you’re diagnosed with a critical illness or undergo a medical procedure.
Policies will always vary from provider to provider, so make sure you read the details of what is and isn’t covered in the plans you consider.
What is income protection cover?
A financial safety net that pays out each month to replace lost income while you’re off work with illness or injury.
Same story here… Policies vary, so make sure you read the details of what is and isn’t covered in any plans you consider taking out.
Income protection vs critical illness: what’s the right choice for me?
To answer this question, your best bet is to talk to an independent financial adviser, who will help you define how much cover you need and which providers are the best fit. Of course, hiring an adviser would mean an extra bill to pay, but in the long run, it’s usually well worthwhile. If, on the other hand, you would prefer to go the DIY route, here’s what to consider.
Do I need critical illness cover?
Critical Illness Cover is particularly useful when your family is heavily dependent on your income; when you don’t have an employee benefits package to cover a long period of illness; and when you don’t have enough savings to keep you going if you were to stop work.
It’s less vital to take out a plan if you have other backups, such as a substantial savings stash or a partner who could cover living costs. You might also be fine without it if you don’t have many financial commitments like dependents and mortgage payments.
Before you take out a new policy, check whether you already have some sort of illness cover included as a benefit with any of your insurance policies or mortgages. Also, check with work to see if you are entitled to any employment benefits that would pay out if you’re ill.
Do I need income protection cover?
Although many employers will support people with some level of income if they fall ill, this won’t last forever. Generally, employees are moved to Statutory Sick Pay within six months, which works out to less than £100 a week. This drop in regular income can wreak havoc if your household outgoings depend on you and can’t be taken over by a partner. And if you’re self-employed, with no sick pay to fall back on, income protection becomes even more valuable.
As was the case with critical illness cover, you can probably go without if you’re confident you could get by on sick pay and benefits alone, if you have substantial savings, or if you have a generous and supportive family.
If you decide to take out income protection, you’ll first have to figure out how much income you need to cover. To find this figure, start with your income after tax, then subtract what you would get in state benefits, subtract work-related costs like travel and food, and add on any expenses you might need if you become ill, such as extra heating or medical equipment.
Should I get both critical illness and income protection?
There is certainly an argument for getting both critical illness cover and income protection cover, albeit an expensive argument.
If you have both and a critical illness strikes – let’s say cancer – then you could use the hefty lump sum from your critical illness cover to pay off debts, clear the mortgage, or get yourself the best private healthcare.
At the same time, you could use your income protection cover to handle the day-to-day bills and any regular monthly expenses for as long as you are off work. This double-whammy approach would support you both at the time of diagnosis and into the future.
I’m in… where can I go to shop around?
If you go down the independent financial adviser route, you can rely on them to scour the market and bring you a hand-picked selection of the best options for you. Simple.
If you go down the DIY route, the usual comparison sites are a good place to start your search. Generally, income protection is easier to buy as a standalone product, with critical illness more often coming as an add-on to life insurance policies (but not always, so always check).
As ever with chunky, expensive products like these, take your time and triple-check the fine print.
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