Recent events have acted as a stark reminder about the importance of protecting ourselves financially – the pandemic has made us all aware that illness can strike at any time and of the devastating impact this can have on ourselves and our families.
Here we explain the ins and outs of critical illness cover and income protection insurance, the difference between the two, and which type of cover might work best for you.
- What is critical illness cover?
- What is income protection insurance?
- What is the difference between critical illness and income protection insurance?
- Which cover would suit me best – income protection or critical illness insurance?
- Would critical illness or income protection insurance cover me for COVID-19 ?
- Independent financial advisers, here to help
Critical illness cover is a long-term insurance policy that pays out a tax-free lump sum if you develop a serious illness, which must usually be permanent or terminal. To receive a payout, your condition must be specifically listed as a critical illness within your policy wording.
Examples of specified critical illnesses include (but are by no means limited to):
- Heart attack
- Certain cancers/stages of cancers
- Alzheimer’s disease
- Multiple sclerosis
The payout you receive can help you pay your rent or mortgage, bills, and any adaptations you might need to make to your home to accommodate your illness or disability.
Income protection insurance is designed to provide you with a monthly income if you are unable to work due to illness or injury. It will pay out a percentage of your usual monthly income until you can return to work, allowing you to recover without the stress of a significantly reduced income.
This type of cover usually features a waiting period, with payments designed to commence once you’re no longer covered by sick pay or other insurance policies. You can keep your premiums low by making the waiting period longer, and vice versa. You can also usually claim multiple times within the policy term for different injuries or illnesses.
While income protection covers a wider range of illnesses, insurers use a ‘definition of incapacity’ to determine the eligibility of a claim. The two most common definitions are:
- Suited Occupation – if you are off work due to illness or disability, your insurer will assess your skills and capabilities and decide whether you could conceivably perform another job to which you are ‘suited’.
- Own Occupation – your insurer will assess your ability to perform the duties and responsibilities of your current role.
There are a number of differences between the two types of protections:
- Critical illness cover pays out a single lump-sum, while income protection insurance pays out a monthly allowance (normally a set percentage of your usual monthly income) until you are well enough to return to work or you retire.
- Critical illness cover will only pay out if you are diagnosed with a specific serious illness that is listed within your policy wording. On the other hand, you can claim on your income protection insurance for most illnesses or injuries that leave you unable to work.
- While you can claim multiple times on an income protection policy, a critical illness policy is designed to provide a one-off payout.
Choosing which cover is right for you will depend on a number of factors including whether you’re looking for a lump sum payment or a regular payout of a percentage of your monthly salary, the level of flexibility offered by the policy, and of course, cost.
- Lump sum payment
Many people feel more comfortable at the thought of a lump sum payout, so if you’re one of them, then critical illness cover could be best for you. It also allows you to choose the level of cover you want, although of course covering yourself for a bigger lump sum will inevitably increase your premiums.
But it’s important to remember that you’re not entitled to multiple payouts. As soon as your insurer has paid out on a claim, your policy will come to an end. What’s more, if or when the money runs out (which may be sooner than you think if you’re using it to pay for equipment, adaptations to your home, carers, etc. that may be required following your illness), no further support will be forthcoming.
- Regular payout
Income protection insurance pays out a percentage of your regular income, providing ongoing cover for any illness or injury that prevents you from working. The disadvantage here is that your monthly payouts are limited to what you’re currently earning; if you’re on a low income, your payouts will be accordingly low.
However, the policy is designed to cover you until you return to work, or until you retire. If you never return to work due to your illness or disability, income protection could actually pay out more in the long term than a lump sum critical illness policy.
In some ways, critical illness cover isn’t as flexible as income protection, as it only covers a scheduled list of illnesses. In comparison, income protection is there to cover you against most illnesses that prevent you from working, so it could be argued that income protection insurance is more flexible and there is less chance that your insurer will refuse to pay out on your claim.
Critical illness cover on the other hand, has the advantage of paying out straight away, whereas you’ll have a waiting period before any payout starts with an income protection policy. This may be unsuitable if you have little or no savings to fall back on if your income were to stop suddenly. So, if losing your income would leave you financially fragile within months, it may be best to take out a critical illness policy.
Your monthly premiums will typically be lower if you opt for income protection insurance, despite the total potential payout often being higher (i.e. it would pay out more in the long term if you never recovered sufficiently to return to work).
This is because the likelihood of the insurer having to pay out the full amount is much less than with a critical illness policy (where the policyholder is certain to receive a full payout if they meet the policy criteria), as most people who are unable to work are usually able to return after a period of recovery.
It’s unlikely that a critical illness policy would cover you if you contract Coronavirus, for several reasons. Firstly, as a new illness, it’s unlikely to be listed as a specific illness within your policy. Secondly, Coronavirus is a mild illness for the majority of people - so is unlikely to be categorised as a critical illness - in most circumstances anyway.
However, if you were to go on to develop another serious condition as a result of contracting COVID-19, which is listed within your policy (e.g. kidney, liver, heart or respiratory failure), then yes, you would be covered.
Income protection insurance is likely to pay out if you were out of work long-term due to Coronavirus symptoms or complications. However, if you were self-isolating, you would be unlikely to be covered unless your isolation has been advised by a medical professional. Furthermore, the waiting period means that you would usually have come out of self-isolation by the time any payout could be made.
If your Coronavirus symptoms were to continue beyond the waiting period, then your claim may be accepted by your insurer, subject to individual policy terms and conditions.
There is increased demand right now for insurance policies that protect against serious illness - the Coronavirus crisis has shown just how easily being unable to work can turn our world upside down.
If you are thinking about critical illness or income protection insurance, feel free to give us a call. Our ‘whole of market’ approach means that we can scour the entire insurance market in order to find the cover best suited to you.
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This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice. Some information quoted was obtained from external sources we consider to be reliable.
Tees is a trading name of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered number 211314. Tees Financial Limited is registered in England and Wales. Registered number 4342506.
Chat to the Author, Nick Coey
Wealth Planner, Wealth Management, Cambridge officeMeet Nick
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