Should you choose Income Protection or Critical Illness Cover?

Planning for the unthinkable is one of the most important things you can do for your family. Unfortunately, none of us knows what the future holds. But you can be prepared with insurance to protect your loved ones financially if you suffer a serious illness or accident that leaves you unable to work.


There are a number of products that are designed to take away the financial strain if something does happen. The two main options to choose between are Income Protection and Critical Illness Cover. Both are similar in that they pay out money if you are unable to work. But there are also some key differences to consider. If you’re not sure whether Income Protection or Critical Illness Cover would be best for you, read on.


Why do I need Income Protection or Critical Illness Cover?

Different employers can have different rules when it comes to sick pay. There is no automatic entitlement to full pay if you go off sick for more than four days in a row. You may be able to claim statutory sick pay of £92.05 a week for up to 28 weeks.


If you are self-employed, you won’t have this benefit. You may be eligible for state help, for example, the Personal Independence Payment, which offers a standard weekly pay out rate of £57.30.


These amounts may not be enough to cover your bills such as your mortgage. Income Protection and Critical Illness Cover steps into this breach to ensure you have the cash you need.


What’s the difference between Income Protection and Critical Illness Cover?

On the face of it, Income Protection and Critical Illness Cover can seem quite similar. Both give the policy holder money if an accident or illness prevents them from working. But there are some subtle differences between the two. Our guide outlines these differences so you can decide which is right for you and your family.


What does Income Protection provide?

The payout

  • Income Protection pays you a monthly income if you are unable to work due to illness or an accident.
  • The amount paid is normally a percentage of your earnings.
  • You choose the length of waiting time before claims are paid. Usually, the shorter the period before a claim is paid, the higher the premium will be.
  • Income Protection is usually used to cover essential bills like your mortgage, but there is no restriction on how you spend the money.
  • Some Income Protection plans are limited. That means they will only pay out for a set period six or 12 months. These are cheaper to purchase but could leave you without enough cash to cover essential bills in the future if you are left unable to work for longer than that period.
  • Other Income Protection plans will have no limit but would come to an end when you reach retirement age or can return to work. Income Protection plans with no limit on the time period give you peace of mind that you can cover household bills for as long as you cannot work.

Definition of illness/injury

  • With Income Protection the key factor that is considered is whether your illness or injury prevents you from working, not what the illness or injury is. So you could lose the sight in one eye in an accident, but if that does not stop you from working you would not be eligible for any payouts
  • If you become disabled as a result of an accident or illness, again Income Protection will pay out for as long as that disability prevents you from working.


What does Critical Illness Cover provide?

The payout

  • You’ll be paid a one-off lump sum if you are unable to work due to illness or accident.
  • You’re free to spend this cash sum how you wish, but once it’s gone, it’s gone.


Definition of illness/injury

  • Unlike Income protection, Critical Illness cover will set out very clearly what illnesses and injuries are covered by the policy. It will also set out the payout amount for each illness or injury. For example, an accident or illness that results in blindness will have a defined financial payout.
  • If you suffer a disability as a result of illness or injury, Critical Illness cover will normally give you financial compensation. To be sure what’s covered you’ll need to check the small print.
  • Common conditions that can stop you from being able to work, such as back pain and stress are not always covered by Critical Illness Cover, so make sure you check the small print if that is important to you.


Can I spend the money how I want?

Whether you opt for Income Protection or Critical Illness Cover, how you spend the money is up to you.


Are Income Protection and Critical Illness payments taxable?

Both give you a sum of money tax-free if you pay for it yourself from your net income. If you are self-employed and pay for cover through your business, any payment would be subject to tax. It might be a good idea to speak to your accountant for advice.


Should I take out Critical Illness Cover or Income Protection if I am self-employed?

If you’re self-employed, it’s wise to consider some form of income protection regardless of whether you have dependants. That’s because unlike someone who is employed, you can’t fall back on a company sick-pay scheme if you are ill or injured. Many people who are self-employed take out both Income protection and critical Illness cover for peace of mind that every potential outcome is covered.


Are there any other personal insurance products to consider?

If you have children or family who depend on you financially, you may want to consider taking out life insurance. This provides a lump sum or regular monthly payments if you die.


What else do I need to think about when considering Income Protection and Critical Illness Cover?

Income Protection payouts are based on your salary. But this does not take account of inflation. If you are faced with many years unable to work, you could be in a situation where the payouts made in the future are not high enough to cover your needs. In this case, taking out cover for inflation can be beneficial. It will give you peace of mind that whatever happens with inflation, the money you receive will be enough to cover your bills.


Get a quote for Income Protection or Critical Illness Cover

Our team of specialist personal insurance experts can guide you through what personal insurance is right for you. Give us a call on 0117 955 6935 or get in touch and we’ll look at your individual situation to prepare a tailored plan to meet your budget and needs. As a family-run, independent business, we have over 20 years experience helping families to be prepared, whatever may happen.

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