It is sometimes easy to think that an income shock such as a long-term or critical illness will never happen to us. However, thinking about how your bills would be paid if the unthinkable happened to you is essential. Income protection and critical illness cover, two of the main types of insurance, can sometimes be confusing due to subtle but key differences between them.
Income protection insurance is a policy which pays out a regular amount each month should you no longer be able to work due to illness or injury. The payments are based on annual earnings and most insurers offer a maximum of up to 80% of your monthly salary. Payments continue until you can return to work. If this is not possible, payments continue for the length of time determined by the policy, which could even be until retirement.
Income protection payments are activated when illness or injury prevents a person from working and because it is based on your ability to work, it usually covers a wider range of illnesses or conditions. Multiple claims can be made over the length of the policy and each one is counted as new. Income protection insurance also has the benefit of allowing you to opt for different deferred periods of time to help keep the premiums affordable.
This means that workers can take advantage of their employer’s sickness scheme, which in many cases offers full sick pay for the first three to six months. Income insurance can also be good for the growing army of self-employed workers who do not have the benefit of a company’s sick pay or benefit scheme to fall back on.
Under critical illness cover, workers receive a lump sum pay out when they are diagnosed with a named illness. The lump sum amount, which can be broken up into monthly payments if requested, is chosen by you under the policy and is in no way linked to earnings. A benefit of this type of policy is that once a pay-out has been made, you do not have to pay this back even if you make a full recovery from the condition or illness.
This type of cover can be useful for paying for medical treatment, essential modifications to a home or paying off a mortgage. However, only illnesses or conditions that are named in the policy will activate payment. The policy will also expire once a payment has been made. Critical illness cover can be taken out in a joint policy alongside life insurance, so it is important to remember that life cover may also cease to be in effect once a payment is made. Due to its one-off nature and typically larger sum assured, critical illness cover does tend to be the more expensive option and is often selected as a ‘safety net’ tactic.
It is also possible to have standalone policies of critical illness cover and income insurance at the same time so getting professional advice is essential to make sure your needs – and your peace of mind – are addressed.