Critical Illness Insurance vs Income Protection: Which is Right for You?

When illness or injury prevents you from working, having the right financial protection becomes crucial. But choosing between critical illness cover and income protection insurance can feel overwhelming. Let's break down the key differences to help you make an informed decision.

Understanding the key differences

Critical illness cover pays out a tax-free lump sum if you're diagnosed with a specific serious illness listed in your policy, such as cancer, heart attack, or stroke. You must survive for at least 10-14 days after diagnosis to claim. Coverage is limited to around 30-52 specific conditions listed in your policy.

Income protection insurance provides ongoing monthly payments if you can’t work due to virtually any condition that prevents you from doing your job, making it far more comprehensive than critical illness cover.

Is income protection better than critical illness?

Of the two, income protection offers a broader definition of illness and injury. If you have a bad back or experience depression, for example, you may find they aren't covered by critical illness cover.

Critical illness provides a one-time lump sum that might not last if you're unable to work long-term, while income protection offers regular payments that continue until you return to work or reach retirement age. While critical illness cover is generally less expensive initially, income protection provides better value considering its broader coverage.

What are the disadvantages of income protection insurance?

Despite its advantages, income protection has drawbacks:

• Limited payout. An income protection policy won't pay out your full income - it will pay out between 50% - 70% of your usual earnings.
• Waiting periods. Most policies include deferred periods before payments begin, from four weeks to two years. You'll need to manage financially during this time.
• Cost barriers. Income protection uptake remains low at around 6% in the UK, with many citing cost as a key reason for not taking out a policy.
• Exclusions. Pre-existing conditions may be excluded, and higher-risk occupations face higher premiums or coverage restrictions.

Making your choice

Consider your existing protection first. You can get £118.75 per week Statutory Sick Pay (SSP) if you're too ill to work. It's paid by your employer for up to 28 weeks - hardly sufficient for most people's expenses. However, if your workplace sick pay is generous, you might want to consider critical illness cover to complement your existing benefits.

For those who are self-employed and therefore not entitled to statutory sick pay, income protection can be particularly valuable.

The bottom line

Both products serve different purposes in your financial protection strategy. Your age, health, occupation, and financial commitments should influence your decision. Income protection offers broader, ongoing support for various conditions, while critical illness cover provides substantial lump sums for specific serious illnesses.

Speak with a qualified financial adviser who can assess your individual needs and recommend the most suitable protection strategy.