Do you know the difference between income protection and critical illness cover?

The weather forecast is an incredibly useful tool that helps you plan for the day ahead. It could even save lives if it warns about extreme weather events. Yet, as you’ve probably experienced, the forecast isn’t always accurate.

According to Forbes, a seven-day forecast accurately predicts the weather about 80% of the time and a 10-day forecast is only right about half the time. That’s why you might decide to grab an umbrella on the way out, even if the forecast is for sun, just in case it does rain after all.

Similarly, in life, we can’t always predict what lies ahead which is why it’s important to be prepared for the unexpected, and financial protection is like your umbrella.

Protection gives you a crucial safety net that may allow you and your family to remain financially secure and continue working towards your goals, even if the worst happens. It could be especially useful if you become ill and can’t work.

In this situation, you might benefit from income protection or critical illness cover. But you may not know the difference between the two types of protection or which option is most suitable for you.

Income protection pays a portion of your salary if you’re unable to work

If you’re out of work due to illness, injury, or redundancy, you may find it difficult to meet your short-term financial obligations and it could be harder to work towards your long-term financial goals if you can’t contribute to pensions, savings, and investments.

This is a concern for many as Cover Magazine reports that 37% of parents worry about their own and their families’ financial security if they were to experience a serious illness or injury. Additionally, 15% of people said they would likely rely on loans or credit cards to cover living expenses if they were out of work for two months or more.

Fortunately, income protection can help in this situation as it provides a regular monthly payment until you can return to work. Although you may not receive as much as your full salary, the payment can be enough to cover your bills and possibly contribute to savings for the future. As a result, a period when you’re unable to work is less likely to disrupt your ability to achieve your long-term financial goals.

Normally, income protection has an “excess period” – an amount of time you have to be out of work before the payments begin. The premiums are typically higher if you have a shorter excess period, yet you benefit from the payments sooner.

It may be useful to see whether you will receive sick pay from your employer. You’ll also benefit from Statutory Sick Pay (SSP) from the government for 28 weeks. You may decide to choose an excess period that aligns with the length of time you receive sick pay from your employer and SSP. That way, when your sick pay stops, the income protection payments will kick in.

There are several factors affecting the cost of income protection including:

  • Your age
  • Your health
  • The level of income you want to cover
  • The length of time you want the payments to continue.

Income protection doesn’t cover every eventuality, and the specific health conditions that are covered vary depending on the provider. That’s why it’s important to read the policy carefully to understand precisely when you can benefit from income protection.

Having income protection may be useful during periods when you can’t work as it means you can continue making progress towards your financial goals and you may be able to avoid using your savings to cover your general expenses. It could be especially useful if you’re self-employed as you don’t benefit from sick pay from an employer or SSP from the government.

Critical illness cover pays a lump sum if you’re diagnosed with a serious condition

The physical and emotional toll of dealing with a serious illness can be hugely challenging. However, people often overlook the financial toll of long-term illness.

According to Macmillan Cancer Support, 83% of people with cancer are, on average, £570 worse off every month due to their illness. This may be because of extra costs including fuel for hospital trips, medical care costs, specialist equipment, or modifications to the home.

Critical illness cover pays a lump sum if you’re diagnosed with or need treatment for a qualifying medical condition. You could use this money to pay off your mortgage, cover additional costs associated with your illness, or maintain your lifestyle if you’re unable to work.

The cost of critical illness cover depends on:

  • Your age
  • Your health
  • The amount you will receive as a lump sum.

Only certain illnesses are covered, and the specific conditions vary depending on the provider. You may not benefit from cover for pre-existing conditions either so, like income protection, it’s important to check your policy carefully so you know when your critical illness cover will pay out.

Critical illness cover could give you and your family financial security and peace of mind if you’re diagnosed with a serious illness that has a lasting effect on your life.

Additionally, if you have a terminal illness, the payout could help you take care of your family financially and enjoy as many meaningful experiences as possible with them while you still can.

You may benefit from both types of protection as they serve different needs

People often think that they need either income protection or critical illness cover but it may be beneficial to invest in both forms of protection since they serve different needs.

Income protection can bridge the gap and reduce disruption to your financial plan if you’re unable to work for a short period of time. Yet, it may not be as useful if you are diagnosed with a serious illness that has long-term financial and health implications. That’s because income protection normally pays a portion of your salary, and this may not be enough to maintain your lifestyle in the long term and work towards your goals.

Critical illness cover, on the other hand, pays a lump sum that could help you achieve long-term financial security. For instance, you might be able to pay off your mortgage or top up your pensions while also paying your normal living expenses. The lump sum from critical illness cover can also be incredibly valuable if you have additional healthcare costs such as specialist equipment.

As such, purchasing both income protection and critical illness cover ensures that you and your family are prepared for anything.

Get in touch

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Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Note that critical illness and income protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.

Posted in Financial Planning, Financial Services, News.