If you’re exploring ways to protect your income and financial stability in case of illness, you’ve probably come across two standard options: critical illness cover and income protection insurance. While both types of insurance provide a financial safety net if your health takes a turn, they work in very different ways.
In this guide, we’ll explain the key differences, when you might choose one over the other, and how to decide what’s right for you
What is critical illness cover?
Critical illness cover pays out a single, tax-free lump sum if you are diagnosed with a serious medical condition listed in your policy.
It is designed to help with one-off costs that come with a life-changing illness, such as:
- Private medical treatment
- Adapting your home
- Clearing debts or paying off your mortgage
- Taking time off work to recover
Common conditions covered:
- Cancer
- Heart attack
- Stroke
- Multiple sclerosis
- Organ failure
- Major surgery
The exact list of conditions and the definitions vary between insurers, so it’s essential to read the policy wording carefully.
What is income protection?
Income protection pays you a monthly income if you are unable to work due to illness or injury. It continues to pay you either until you return to work, the policy ends, or you reach retirement age, depending on the terms.
It is designed to replace a percentage of your income so you can keep up with day-to-day living costs, such as:
- Rent or mortgage
- Utility bills
- Groceries
- Childcare or school fees
You can typically cover up to 50 to 70 per cent of your pre-tax income.
When would you choose one over the other?
he choice depends on your goals, budget and how you’d cope financially if you were unable to work. Our protection specialists are here to help you make the right choice for your needs.
Choose critical illness cover if:
- You want a lump sum to clear significant debts or pay for treatment
- You’re mainly concerned about specific serious illnesses
- You already have sick pay through work and need top-up protection
Choose income protection if:
- You rely on your income to meet monthly expenses
- You want cover for any illness or injury, not just a list of conditions
- You don’t have sufficient sick pay from your employer
In many cases, having both offers the best protection. Critical illness provides the financial cushion for significant life changes, while income protection ensures stability during recovery.
Real-life example
Tom, a 40-year-old marketing consultant, is diagnosed with a serious heart condition. He receives a £50,000 critical illness payout, which he uses to clear his mortgage for the year and fund an essential private surgery. However, his recovery takes over a year.
If Tom also had income protection, he would receive monthly payments to cover his bills during this period. Without it, he might need to dip into savings or return to work when he isn’t recovered. .
FAQs about critical illness and income protection
Can I claim both income protection and critical illness cover?
Yes, if you have both policies, and qualify for a claim, you can claim on each independently. A critical illness payout does not affect an income protection claim, and vice versa.
Is income protection better than critical illness cover?
Not necessarily. They serve different purposes. Income protection is better suited for long-term income replacement, while critical illness cover is more suitable for significant, one-off expenses.
Does income protection cover mental health?
Yes. Most modern income protection policies cover time off work due to mental health issues like depression, anxiety or stress-related illness, provided you meet the claim conditions.
Are these policies tax-free?
Yes. Payouts from both types of cover are typically free from income tax in the UK, as long as the policy is paid for personally and not through a business.
What’s the cost difference?
Income protection is generally more expensive than critical illness cover because it can pay out over a longer period of time. However, it provides broader protection across a wider range of conditions and scenarios.
Final thought
Critical illness cover and income protection are not the same thing. One offers a lump sum for life-changing diagnoses. The other provides an income stream to help you maintain your lifestyle and keep the bills paid in the event of illness or injury that stops you from working.
To make the right choice, consider how long you could survive without your income, what support your employer provides, and whether a sudden lump sum or ongoing monthly support would better suit your needs.
It’s always worth speaking to one of our protection specialists who can help tailor a solution to your situation. You may find that a combination of both policies offers the best financial protection for life’s uncertainties.
