The difference between income protection insurance and critical illness cover

You can get financial support if you have an unexpected illness or injury, with no restrictions on what the money is used for, with both income protection insurance and critical illness cover. But the two policies apply to very different situations.

Critical illness cover pays you a single lump sum if you’re diagnosed with, or have surgery for, a specified, potentially life-threatening illness. If you have a policy with us, you’re covered for 52 conditions during your policy term. The main benefit is it could help to take away your finanical worries when you need to focus on your recovery or having treatment. Knowing the cash payout could help you pay your mortgage, regular bills, medical treatment, or make any necessary home modifications, could give you valuable peace of mind.

Income protection, on the other hand, provides a percentage of your salary as a regular payment if you can’t work through illness or injury, to bridge the gap until you return.

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 these common conditions aren’t covered by critical illness insurance.

According to the Association of British Insurers (ABI), sales of individual income protection policies hit a record of 247,000 - a 16% increase from 2022 ^{Footnote [1]}. And, as Which? points out, 'Only a minority of employers support their staff for more than a year if they're off sick...Given the low level of state benefits available, everyone of working age should consider income protection.’^{Footnote [2]}

If you do become sick or injured, this policy usually pays out between 50 and 70% of your gross monthly earnings in the long or short term, until you can return to work. While your cover lasts, you can make multiple claims, and payments are tax-free.

Eddie Osei, a small business owner in West Wales, says: “I represent one of the 15% of the UK workforce that’s self-employed and not being able to work due to illness is unimaginable. I could not survive on my savings and certainly don’t want to remortgage my home. With my income protection policy, I have security knowing that monthly bills will be paid and my quality of life sustained until I can get back to work.”

The cost of an income protection policy will depend on your age, medical history, the type of job you do, how quickly you want the policy to pay out, the percentage of income you want covered and the length of cover. You can index-link a policy so your benefits are protected from the effects of inflation, though your premiums may increase.

Insurers group jobs into categories depending on the risk they present, so the riskier the job, the higher your premium. They can view occupations differently, so you might want to get several quotes.

An income protection policy only pays out once a pre-agreed period has passed – known as a deferral period, which can vary from a week to 24 months. The longer deferral you choose, the lower your premiums, but make sure you have enough funds or employer sickness benefit to cover this period.

How your insurer defines your inability to work will influence if, and when, your policy pays out. Every policy has a definition of 'incapacity', so check your documents carefully. A policy with own occupation cover pays out if you can’t perform your current job when you file a claim. As an example, if you can’t continue working as a plumber, you can still claim whilst working in a completely different field. It’s important to understand how your insurer defines incapacity in your policy so that you can figure out whether or not you’re covered. 

All our income protection policies give you 'own occupation', and this is the definition we'll use if you need to make a claim with us.

If you get a serious illness, you may need extra money to help you manage. This is where critical illness cover comes in, providing a one-off financial boost at a difficult time. If you make a valid claim, you get a single, tax-free lump sum to use as you need.

Once this is paid, your policy ends. Unlike income protection, there’s no deferral period, and a claim can be made on diagnosis. However, depending on your policy, you need to survive for at least 10 to 30 days after diagnosis before it will pay out.

It’s important to know that critical illness policies don’t cover all illnesses, and they won’t pay out if you die. To make a successful claim, your condition must be included on your insurer’s list of definitions of serious illnesses. These vary with insurer, but most cover 25 conditions or more.

It’s also important to be aware that your insurer may only pay once your illness hits a certain level of severity, and not all cancers are automatically included. Check the policy details carefully.

The price of this policy is based on a few things, including the length of cover, the cover amount, your age, medical history, lifestyle and occupation. Unlike many other insurers, our critical illness cover can be bought on its own or with a life insurance policy, as they’re not combined. This means a successful critical illness claim won’t affect your life insurance.

Over half of our customers pay just £19.00 a month or less for our critical illness cover ^{Footnote [3]}.

This includes 52 conditions and children’s cover at no extra cost. We also pay an agreed percentage when an additional specified condition is diagnosed, which won’t affect a further critical illness claim in the future.

If you think insurers don't pay out, you might be interested to know that in 2023 we paid 92.5% of critical illness claims totalling £345 million, and 92.5% of income protection claims, totalling more than £53 million ^{Footnote [4]}.

So that might be reassuring, if you’re looking for the financial safety net these policies can provide.