Income Protection vs Critical Illness Cover
Understanding Two Different Ways of Protecting Yourself Against Illness
Income protection and critical illness cover are sometimes confused because both can provide financial support when your health is affected.
However, they work in fundamentally different ways.
Critical illness cover is generally designed to provide a benefit if you are diagnosed with a specified serious medical condition and meet the definition contained within the policy.
Income protection is designed to provide a regular income if illness or injury prevents you from working and you satisfy the policy's definition of incapacity.
One focuses primarily on a qualifying diagnosis.
The other focuses primarily on your ability to work.
Understanding that difference is important when deciding how you might protect your mortgage, household expenditure and income.
What Is Income Protection?
Income protection is designed to replace part of your earnings if illness or injury prevents you from working.
Rather than providing one large lump sum, it generally pays a regular benefit following the selected deferred period.
Depending on the policy, payments may potentially continue until:
you return to work;
you no longer meet the definition of incapacity;
the maximum claim period is reached;
the policy term ends; or
another event specified within the policy occurs.
The precise benefit and conditions depend on the policy and insurer.
What Is Critical Illness Cover?
Critical illness cover is designed to provide a benefit if you are diagnosed with one of the conditions covered by the policy and meet the insurer's definition.
It is commonly arranged as a lump-sum benefit, although policy structures vary.
The money could potentially be used to:
repay or reduce a mortgage;
clear other debts;
replace some lost income;
fund home adaptations;
cover additional childcare;
support rehabilitation; or
provide a financial reserve.
A diagnosis alone does not automatically guarantee a payment. The condition must satisfy the policy definition and other claim requirements.
The Main Difference
The simplest way to understand the distinction is:
Income protection asks whether illness or injury prevents you from working.
Critical illness cover asks whether you have suffered a condition covered by the policy and meet its definition.
That difference can be extremely important.
Someone could be unable to work for a prolonged period because of an illness or injury that does not meet the definition required for a critical illness claim.
Equally, somebody could receive a critical illness payment following a qualifying diagnosis even if their absence from work is not permanent.
Lump Sum vs Regular Income
Another major difference is how benefits are generally paid.
Critical illness cover commonly provides a lump sum following a valid claim.
Income protection generally provides a regular benefit while a valid claim continues, subject to the policy terms.
These benefits are designed to solve different financial problems.
A lump sum could help reduce a large financial commitment such as a mortgage.
Regular income can help maintain ongoing household expenditure.
A Simple Example
Imagine somebody earns the majority of their household income and has a mortgage, children and regular monthly commitments.
They develop a serious medical condition covered by their critical illness policy.
A successful claim could provide a lump sum that might be used to reduce the mortgage and create a financial reserve.
But what if the same person instead develops an illness or injury that prevents them from working for a prolonged period but does not satisfy the definition of a condition covered by their critical illness policy?
There may be no critical illness payment.
An appropriate income protection policy could potentially provide regular financial support if the person satisfies its definition of incapacity.
This demonstrates why the two types of protection should not be treated as interchangeable.
Does Critical Illness Cover Replace My Salary?
Not in the same way as income protection.
Critical illness cover generally provides the insured benefit following a valid qualifying claim.
It is not normally designed to calculate and replace a monthly salary for as long as somebody remains unable to work.
You could choose to use some of a critical illness payment to support household expenditure, but the policy itself is solving a different problem.
Does Income Protection Pay a Lump Sum?
Income protection is generally designed around regular benefit payments rather than providing the large lump sum typically associated with critical illness cover.
Its purpose is to help replace part of the income you lose while unable to work.
The exact payment structure depends on the policy.
Which One Protects My Mortgage?
Potentially both, but in different ways.
Critical illness cover could provide a lump sum that might be used to repay or reduce the mortgage following a valid claim.
Income protection could provide regular income that helps you continue making mortgage payments alongside other household expenses.
One potentially addresses the size of the debt.
The other potentially addresses your ability to continue meeting monthly commitments.
Reducing the Mortgage vs Maintaining Your Lifestyle
Imagine that critical illness cover repays the mortgage completely.
That could remove one of the household's largest monthly expenses.
However, you would still need money for:
food;
utilities;
transport;
childcare;
insurance;
clothing;
household maintenance; and
everyday living.
This is where protecting income can become important.
A household does not become financially independent simply because the mortgage has been repaid.
What If I Have Income Protection but No Critical Illness Cover?
An income protection policy could potentially provide regular financial support while you are unable to work because of illness or injury, subject to the policy terms.
However, it may not provide the large lump sum you would want following a serious diagnosis.
For example, you might want money to:
reduce your mortgage significantly;
adapt your home;
repay debts;
fund substantial one-off expenses; or
create an immediate financial reserve.
Income protection and critical illness cover therefore address different aspects of financial vulnerability.
What If I Have Critical Illness Cover but No Income Protection?
Critical illness cover can provide valuable financial support if you experience a condition covered by the policy.
But people can be unable to work for many reasons that do not result in a critical illness payment.
These can include illnesses and injuries that are serious enough to affect your ability to work without meeting a particular critical illness definition.
Without income protection, you may therefore still have a significant risk associated with losing earnings.
Does Income Protection Cover More Illnesses?
It is better to think about the policies differently rather than simply counting illnesses.
Critical illness insurance contains specified medical conditions and definitions.
Income protection is generally based on whether illness or injury prevents you from working under the policy's definition of incapacity.
It therefore does not normally operate from the same fixed list of critical illnesses.
However, exclusions, underwriting and policy definitions remain important.
Why Critical Illness Definitions Matter
Critical illness policies do not simply pay because somebody has been diagnosed with something they consider serious.
The diagnosis must satisfy the insurer's policy definition.
Definitions can include specific medical criteria.
Policies can also differ in the conditions and additional benefits provided.
This is why comparing critical illness policies simply by counting the number of conditions can be misleading.
Why the Income Protection Definition of Incapacity Matters
For income protection, one of the most important considerations is how the policy determines whether you are unable to work.
An own occupation definition, for example, considers your ability to perform your own occupation according to the policy terms.
Other definitions may operate differently.
The quality and suitability of the incapacity definition can therefore be central to understanding the protection being provided.
What Is a Deferred Period?
Income protection normally includes a deferred period.
This is the period you generally need to be unable to work before the insurance benefit begins.
The deferred period can potentially be aligned with:
employer sick pay;
savings;
other household income; and
existing financial resources.
Critical illness cover does not operate using the same income-replacement deferred-period structure.
What Is a Survival Period?
Critical illness policies may include a survival period.
This can require the insured person to survive for a specified period after satisfying the definition of a covered condition before the benefit becomes payable.
The exact requirements depend on the policy.
This should not be confused with the deferred period used in income protection.
Short-Term vs Long-Term Income Protection
Income protection policies can have different maximum claim periods.
Some provide benefits for a limited period per valid claim.
Others may potentially provide benefits for considerably longer, subject to the policy conditions.
This can make a substantial difference if somebody develops a condition that prevents them from returning to work for many years.
Critical Illness Is Usually About a Defined Event
Critical illness cover generally responds to a qualifying medical event.
Once a valid full claim is paid, what happens to the policy depends on its structure and terms.
Income protection works differently.
A valid income protection claim may continue while the insured person remains eligible for benefit, subject to the maximum claim period and other policy conditions.
Can I Claim on Both?
Potentially, if you have separate or appropriately structured policies and satisfy the claim requirements of each.
For example, a serious medical condition might satisfy a critical illness definition and also prevent you from working.
In that situation, the circumstances could potentially meet the requirements of both policies.
However, this depends entirely on the individual policies, underwriting and claim circumstances.
It should never be assumed that one successful claim automatically guarantees another.
What About Employer Sick Pay?
Employer sick pay is particularly important when considering income protection.
If your employer continues paying your salary for a period, this can influence when you need income protection benefits to begin.
Before arranging cover, establish:
how long full pay lasts;
whether reduced pay follows;
how long reduced pay lasts; and
what happens afterwards.
This information can help determine an appropriate deferred period.
What About Savings?
Savings can help bridge a temporary period without income.
The important question is how long they would last.
Suppose a household needs £3,000 each month to meet its normal commitments.
Savings of £12,000 might initially appear substantial, but without income they could potentially represent only a few months of normal expenditure.
The example is deliberately simplified, but it demonstrates the difference between having emergency savings and being financially protected against a prolonged inability to work.
What About State Support?
State support may be available depending on individual circumstances and the rules applying at the time.
However, it should not automatically be assumed that state benefits would replace your normal earnings or maintain your existing standard of living.
When considering protection, the potential financial shortfall should be understood.
Income Protection for Employees
Employees may have access to workplace benefits that reduce the amount of personal protection required.
These might include:
employer sick pay;
group income protection;
Death in Service;
private medical insurance; or
other employee benefits.
Before arranging personal protection, understand exactly what is already available and how long those benefits last.
Income Protection for Self-Employed People
Self-employed people may have little or no employer-provided financial support.
If they cannot work, income may reduce quickly.
Meanwhile:
mortgage or rent continues;
household bills continue;
business expenses may continue; and
other financial commitments remain.
This can make protecting income particularly important to consider.
Critical Illness Cover for Self-Employed People
A serious illness could also create substantial one-off financial pressure for somebody who is self-employed.
A critical illness benefit could potentially provide capital to reduce debts or create a financial reserve.
For some self-employed people, considering both income protection and critical illness cover may therefore address different aspects of the same overall risk.
Protection for Company Directors
Company directors can have more complicated income arrangements.
Income may include salary and other forms of remuneration.
This can affect how insurers calculate the amount of income protection available.
Directors can also have protection needs relating to the company itself.
Personal income protection and critical illness insurance should therefore be distinguished from separate business protection arrangements.
Protection for First-Time Buyers
Buying a first home often creates a substantial new monthly commitment.
At the same time, a large proportion of savings may have been used for:
the deposit;
legal fees;
moving expenses; and
other purchase costs.
That can leave less emergency cash available immediately after completion.
For first-time buyers, it can therefore be useful to consider both:
How would I pay the mortgage if illness or injury stopped me working?
and:
What would I want financially if I were diagnosed with a serious illness?
The answers may lead to different protection needs.
Protection for Families
Families often have multiple financial dependencies.
If a parent cannot work, the effect may extend beyond the missing salary.
There could also be changes to:
childcare;
working arrangements;
transport;
household responsibilities; and
future financial plans.
A serious illness can also affect the working capacity of the other partner if they need to provide care.
Protection planning should therefore consider the household rather than viewing each policy in isolation.
What About Children's Critical Illness Cover?
Some critical illness policies may include or offer benefits relating to children.
The financial consequences of a child's serious illness can affect the parents even though the child has no employment income to protect.
A parent may need to reduce working hours or stop working temporarily to provide care.
This is a different risk from personal income protection and should be considered separately.
What If I Already Have Medical Conditions?
Previous or existing medical conditions can affect both types of insurance.
An insurer may:
offer standard terms;
alter the premium;
apply exclusions where appropriate;
request further medical information;
postpone consideration; or
decline the application.
The outcome can differ between income protection and critical illness cover because the risks being insured are different.
Underwriting Can Differ Between Insurers
Two insurers do not necessarily assess the same medical history or occupation in exactly the same way.
One insurer may be comfortable with circumstances another insurer considers differently.
This is one reason protection research can involve more than simply comparing the cheapest premium.
Accurate Disclosure Is Essential
Both types of protection rely on accurate information being provided during the application.
Questions about:
medical history;
medication;
investigations;
occupation;
lifestyle;
smoking or nicotine use; and
other relevant circumstances
should be answered accurately.
Incorrect or incomplete information can affect how a future claim is assessed.
What Does Indexation Mean?
Both income protection and critical illness policies may offer options designed to increase benefits over time.
The objective is to help the protection keep pace with rising costs.
Depending on the policy, increases may be linked to an inflation measure such as the Retail Prices Index or another specified method.
Premiums may also increase as the benefit increases.
Indexation can be particularly relevant to policies intended to remain in place for many years.
Which Is More Expensive?
There is no universal answer.
Premiums can depend on factors including:
age;
health;
smoking status;
occupation;
amount of cover;
policy term;
deferred period;
benefit period;
policy features; and
insurer underwriting.
Comparing the monthly premium without comparing what the policies actually provide can be misleading.
Which Is More Important?
The answer depends on the financial risk.
If you died, your family could permanently lose your financial contribution.
If you survived a serious illness, you might face significant one-off costs and reduced earnings.
If illness or injury stopped you working for years, the cumulative loss of income could be substantial.
These are different risks.
Protection planning involves deciding which risks exist, how serious their financial consequences would be and how much of each risk you want to insure.
Where Does Life Insurance Fit?
Life insurance adds a third important protection question.
A simple way to think about the three is:
Life insurance:
What happens financially if I die?
Critical illness cover:
What happens financially if I am diagnosed with a specified serious condition covered by the policy?
Income protection:
What happens financially if illness or injury prevents me from working?
A protection plan can use different policies to address different financial consequences.
Do I Need Income Protection and Critical Illness Cover?
Not everybody needs the same combination of protection.
A useful starting point is to consider:
your income;
mortgage or rent;
household expenditure;
debts;
dependants;
savings;
employer benefits;
existing insurance;
health;
occupation;
financial priorities; and
available budget.
The objective should be to identify genuine financial vulnerabilities and decide how they should be addressed.
What If My Budget Is Limited?
A limited budget does not necessarily mean protection planning should be abandoned.
Priorities can be established.
For example, you can consider:
which financial risks would have the greatest impact;
existing employer benefits;
emergency savings;
different amounts of critical illness cover;
different income protection deferred periods;
different benefit periods; and
the amount of monthly premium that can be maintained comfortably.
Protection that becomes unaffordable and is cancelled later may not provide the long-term security originally intended.
Don't Automatically Replace Existing Cover
If you already have income protection or critical illness insurance, review it before replacing it.
Existing policies may contain valuable:
definitions;
underwriting terms;
premiums;
exclusions;
benefit periods; or
additional features.
Your health or occupation may also have changed since the policy was arranged.
A replacement application is assessed based on your circumstances at the time you apply.
Never Cancel Existing Protection Before Replacement Cover Is in Place
Applying for new protection does not guarantee that it will be accepted on the expected terms.
The insurer may require further underwriting or offer amended terms.
Existing cover should generally remain in place until replacement protection has been accepted, started and the consequences of changing policy are understood.
Income Protection vs Critical Illness Cover: Questions to Ask Yourself
When reviewing your protection, consider:
How long would my employer continue paying me?
How long would my savings last?
What happens to the mortgage or rent if my income stops?
How dependent is my household on my earnings?
What would happen if I could never return to my current occupation?
What would I want to happen to my mortgage following a serious diagnosis?
Would my partner need to reduce their working hours?
Do I have children or other dependants?
What protection already exists?
What benefits are available through work?
Could I afford a major one-off expense following illness?
How much protection can I sustainably afford?
These questions help identify the financial problem before deciding which type of policy may be appropriate.
Speak to Cambs Ely Mortgages About Income Protection and Critical Illness Cover
Income protection and critical illness cover are designed to solve different financial problems.
Rather than simply choosing one because it sounds more comprehensive, protection should be considered around your income, mortgage or rent, household expenditure, dependants, savings, employer benefits and existing policies.
Cambs Ely Mortgages provides mortgage and protection advice to clients in Ely, Cambridge, Cambridgeshire and across England, with remote appointments available.
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Important Information
The information contained in this guide is intended for general educational purposes and does not constitute personalised financial, insurance, medical, legal or tax advice.
Income protection and critical illness policies vary between insurers. Cover, benefit limits, definitions, deferred periods, claim periods, exclusions, additional benefits, premiums and underwriting decisions depend on the individual policy, insurer and applicant circumstances.
Critical illness insurance does not cover every illness or diagnosis. Income protection claims are subject to the policy's definition of incapacity and other terms and conditions.
Do not cancel existing protection until any replacement cover has been accepted, is in force and you understand the consequences of replacing the existing policy.