Critical Illness vs Income Protection
In this blog we will explain the differences and uses of critical illness and income protection, and how they can be used to protect your financial position.
In 2014 in the UK, Critical Illness cover outsold Income Protection by 5 to 1. In numerical terms that’s around 1 million people Vs 200,000.*
What is income protection?
Income Protection is insurance which will provide a regular replacement income if you are unable to work due to injury or illness. The insurance is suitable for a variety of people, including business owners, directors and employees. With personal cover, the income is tax free.
What is Critical Illness?
Critical illness is a long-term insurance policy which covers a list of specific medical illnesses, the types of illnesses can differ with different providers. If you unfortunately get one of the listed illnesses, the policy will pay out a tax-free lump sum.
Why do I need protection?
Only a minority of employers support their staff for more than a year if they are off sick from work, this is mainly due to being unable to assist for a lengthy period of time. State benefits aren’t enough to keep you afloat for an extended period of time, therefore everyone as either an employer or employee should consider some form of cover.
Critical Illness V Income Protection
Most people within the advisory industry would say Income Protection is the insurance that provides the best comprehensive cover. There is however room for both on the market.
Below are the main deciding factors between the two:
Income protection, in the majority of cases, is more cost effective than critical illness. But it is always dependent on the individual. For example, a quote for a 35-year old covering £250,000 over 30 years would cost £90 a month through critical illness, whereas it would be around £30 a month through income protection.*
Scope of cover
Theoretically, with some exceptions, income protection covers all medical conditions as it is based upon whether you can fulfil your regular and daily employment duties. The most common reasons for claiming with an income protection policy are stress and back problems, and these conditions are not normally covered under CI policies. Critical illness only covers what is specified in the policy. Therefore, invalidating your policy if you were to get a medical condition that isn’t listed. Also, a CI policy often ends when a claim is paid out whereas multiple claims can potentially be made under an income protection plan.
Dividends and income
Income protection policies have previously struggled to cover dividends and were just able to cover salary. With many directors taking low salary but high dividends out of their companies, critical illness was a more suitable option. However, things have changed meaning income protection now covers both income and dividends, therefore the majority of people are eligible for both protection plans.
Many income protection plans offer rehabilitation to help the policyholder back to work, this works well for the provider as well as reducing the amount paid out if the policyholder can get back to work.
Critical illness will help to alleviate immediate financial stress by paying out a lump sum to help pay off things like mortgages and potentially pay for treatment. However, how useful would a mortgage-free house be if you couldn’t afford to pay the bills?