We should all be able to enjoy life without the nagging thought at the back of our mind: can I afford to get ill? This is exactly what income protection and critical illness can help with. They're both ways of giving yourself financial backup in case you experience illness or injury.

None of us likes to think about becoming unwell or losing our income, but having a fallback option could give you greater financial security and peace of mind. But how do these insurance policies compare? Let's explore.

What is income protection?

Income protection is an insurance policy that pays you a monthly amount if you’re signed off work for any medical reason. This can be any physical or mental illness or injury – literally any medically-caused loss of earnings.

Income protection is an insurance policy that pays you a monthly amount if you’re signed off work for any medical reason.

How income protection works

You’re usually able to insure 50-60% of your pre-tax monthly income under an income protection plan. When you take out a policy, you'll also decide how long you want to be insured for (the policy term) and whether you want short-term or full-term cover. Short-term is cheaper than full-term, but comes with a maximum benefit period – meaning a maximum amount of time it'll pay out for per claim. Full-term, on the other hand, would pay out for as long as you need it to.

Income protection waiting period

Crucially, there is also a ‘waiting period’ with income protection policies. If you become unwell and need to make a claim, you'll have to wait to start receiving your payments, usually for a number of weeks. This depends on the waiting period you agreed to when you took out the policy. Generally, your premiums will be cheaper if you’re able to select a longer waiting period.

Read more about how income protection works here.

What is critical illness cover?

Critical illness cover is an insurance policy that will pay you a lump sum if you’re diagnosed with one of the illnesses or conditions listed in your policy. Typically, these include serious illnesses like heart attacks, cancers and strokes, but each insurer covers a different list of illnesses and conditions, so it’s important to check what you’re covered for when you take out a policy.

Critical illness cover is an insurance policy that will pay you a lump sum if you’re diagnosed with one of the illnesses or conditions listed in your policy.

How critical illness policies work

Most critical illness policies cover a list of core illnesses and additional illnesses. If you’re diagnosed with a core illness, you receive your lump sum and the policy ends; if you’re diagnosed with an additional illness, you receive a proportion of your lump sum and your policy continues. Many policies also allow you to add cover for your children to your policy, at no extra cost.

What the critical illness lump sum is for

Since a critical illness payout is a lump sum, the money can be used however you choose. It might help you cover essential living costs while you're unable to work. It might be needed to help you make adjustments to your home, if your illness or condition requires it – e.g. making it wheelchair-friendly.

How to buy critical illness cover

Critical illness cover can be bought as an add-on to life insurance (known as 'combined' cover), but you can also take out critical illness on its own (known as 'standalone' cover). If you take out a combined policy, remember that it would end if you claimed for an illness, so you'd no longer be covered with life insurance in case of death.

What's the difference between income protection and critical illness insurance?

Income protection Critical illness cover
What it covers Loss of income for any medical reason if you're signed off by a medical professional The critical illnesses or conditions listed in your policy
How it pays out A monthly amount if you lose your income for any medical reason A lump sum if you're diagnosed with one of the illnesses or conditions listed in your policy
When it pays out After your chosen waiting period has elapsed (typically 1, 4, 8, 13, 26 or 52 weeks) Straight away if you're diagnosed with one of the illnesses in your policy
Pros Pays out for any medical reason and provides ongoing protection, making sure you'll always have money coming in each month Pays out a lump sum straight after diagnosis, giving you an immediate financial cushion while you recover
Cons Might stop paying even if you're too ill to work (if you buy short-term cover, which is the most affordable kind) Only covers the illnesses or conditions specifically stated in your policy, so won't pay out if you're diagnosed with something else

Who needs income protection and critical illness cover?

Illness or injury can cause financial instability in any household – especially if a breadwinner's income is suddenly (or eventually) missing. Most of us would benefit from financial protection if we were unable to work for health reasons, because most of us have financial commitments, and many of us have financial dependents too. This includes:

  • Couples
  • Parents
  • Single parents
  • Homeowners
  • Renters
  • Self-employed workers

Our financial responsibilities don't go away when we're unable to work because of our health. Without protection in place, this can lead to using up savings or taking on debt – both of which can set you back in the long run. With insurance like income protection and critical illness cover, the financial consequences of serious or long-term illness can be significantly reduced or avoided altogether.

Illness or injury can cause financial instability in any household. Most of us would benefit from financial protection, because most of us have financial commitments and/or dependents.

Which illness insurance should I buy?

This totally depends on what kind of risk you're willing to live with, what kind of insurance would give you most peace of mind, and what your budget is (after all, you might be able to afford both). Your personal and your family's health history might sway the decision too.

If your main priority is to plan your family’s future with confidence, then income protection, and full-term income protection in particular, can give you peace of mind that you’re never one illness or accident away from financial hardship. Just bear in mind that policies come with a waiting period, and short-term policies stop paying after the maximum payment period.

Critical illness cover can also provide a valuable safety net in the moment when you need it most. But you should always be aware that some illnesses won’t be included in your policy. It's important to delve into the details before you buy, as some policies are likely than others to cover illnesses most relevant to your age, gender and health history.

In the end, getting some insurance protection is better than none, and you will know your circumstances better than anyone. Getting help from an expert is always a good idea as they know the market – so they can match your profile and circumstances to the most suitable policies available.

  • Income protection and critical illness cover both protect you in case of illness but how and when they pay out is different
  • Income protection pays out a monthly amount if you're signed off work for any medical reason; critical illness cover pays out a lump sum if you're diagnosed with one of the illnesses listed in your policy
  • Anyone with financial commitments or dependents would benefit from having illness insurance in place
  • You can buy both kinds of cover, or choose the one that feels most relevant to you, your circumstances and your health history
  • An adviser can help you work out the most suitable illness protection for you

This post is intended for informative purposes only and does not constitute advice.