The difference between income protection and critical illness cover

Income protection insurance and critical illness cover are both insurance plans designed to support you financially through significant health issues. They share some features but are two different types of cover, each with their own purpose.

In this guide, we’ll put income protection against critical illness cover, exploring the main similarities and differences.

Understanding Critical Illness Cover and Income Protection

Not sure if you need critical illness or income protection insurance? Choosing the best option depends on your circumstances. You should consider your age, job, and health.

The ideal first step is to research each product, so you understand what they protect and how they work.

What is income Protection insurance? 

Income protection insurance is designed to protect your income if you can’t work due to illness or injury. It typically allows you to receive up to 70% of your income.

When you set up a plan, you pick your premium (monthly payment) and the percentage of your income you want covered. Usually, higher premiums protect more of your income.

If you need to make a claim and it’s successful, you’ll receive the agreed portion of your salary in regular tax-free payments.

 A key feature is that you do not have to pay any premiums whilst away from work due to illness.

This type of cover can help you focus on recovery without worrying about money. The amount of time your payments last depends on your plan, but in some cases, payments can continue until you can return to work, retire, or the plan ends.

Income protection insurance aims to provide financial support for as long as you need it, though terms can vary. That’s why it’s wise to compare providers and plans before you commit.

What is Critical Illness Cover?

Critical illness cover is a protection plan that pays a one-off lump sum if you are diagnosed with a critical illness on your insurer’s list of covered conditions. For example, claims on cancer and heart attacks are common.

These serious conditions would, in most cases, leave a person unable to work in the same way, whether for a short time or permanently.

Some conditions bring extra expenses that Statutory Sick Pay (SSP) or state benefits may not cover, including treatment, equipment or home adjustments. Critical illness cover can help with these financial burdens and support your usual expenses, such as monthly bills.

Income Protection vs Critical Illness Cover – the similarities

Both types of cover offer financial support if your health suffers, to help you manage your finances during a difficult time.

These plans share some similar benefits:

• Peace of mind: These insurance policies protect you in a time of need, when you are diagnosed with health issues. This can reduce stress should something unexpected happen.
• Flexible payments: Premium payments and payout options vary based on what you agree with your provider. Payouts typically go directly to you to spend however you like.
• Terms and conditions: Each type of insurance has detailed small print. With both types of cover there are exclusions, as you can’t claim for all conditions. You also need to think about any pre-existing conditions, as these could affect your cover.
• Tax-free cover: Usually the payout you receive from either policy is tax-free. This might be different if your policy is through your employer, so it’s always best to double-check.

Income Protection vs Critical Illness Cover – the differences

However, there are key differences between income protection insurance and critical illness cover which you should be aware of.

	Income Protection insurance	Critical Illness Cover
Payout	Pays a percentage of your monthly income when you can’t work because of health issues. This payout helps you have a monthly income to help you keep paying regular household bills.	Gives you a one-off lump sum payment. This could be used to pay off part (or all) of your mortgage. Once this money is gone, you won’t receive any more payments.
Disability	Disability is generally treated the same as a Disability is generally treated the same as a recoverable illness. For the period it prevents you from working (under the terms of your policy) it should pay out.	Usually pays out for permanent and total disability.
What is an ‘illness’ or ‘injury’?	Income protection insurance often broadly defines ‘illnesses and ‘injury’. You’re typically insured if an illness or injury prevents you from working, whatever this may be (apart from stated exclusions).	Tends to be specific, clearly stating exactly which illnesses are covered. For this reason, you should always read the terms and conditions carefully.
Policy length	Income protection can continue after you make a claim, with the potential of a future claim for a different illness or injury if needed.	Critical illness is usually a one-off payment. When you make a successful claim, this will generally be the end of the cover.
Employed vs. self employed	Employed: Can supplement or replace sick pay from an employer. Self-employed: Don’t receive sick pay, so income protection can be an important source of income when they can’t work.	Employed: Provides a lump sum payment regardless of employer sick pay.  Self-employed:Offers a safety net for those without traditional employment benefits.
Income levels	The monthly amount you receive is based on your current income. It’s also worth considering adding inflation cover (indexation). With this option, the benefits and premiums will automatically increase annually in line with inflation.	When you take out critical illness cover, you’ll have a clear indication of the lump sum you’ll receive.

Which plan is right for me? 

Before you settle on an insurance plan, it’s always wise to make sure you’ve weighed up all your options and asked the right questions: 

• Do you want cover that provides regular payments if you’re unable to work due to illness or injury, helping to replace lost income over a longer period? If so, income protection insurance might be a better fit. 

Or would you prefer insurance that pays out a one-off lump sum if you’re diagnosed with a specified serious illness, helping with immediate costs or financial commitments? If so, critical illness cover might be the right choice. 

Income Protection vs Critical Illness FAQs

Why would you need Income Protection insurance? 

Not all employers offer sick pay. If they do, it might not last long. After this, Statutory Sick Pay is only £116.50 per week for up to 28 weeks, which may not cover all your expenses.

Self-employed workers usually don’t have sick pay to fall back on. This is when income protection insurance can help to provide sufficient monthly income to pay your bills.

Some income protection plans also come with extra benefits. For example, Shepherds Friendly members with Income Protection get Enhanced Benefits. This includes 24/7 access to Nuffield Health’s GP service and discounted gym memberships.

YYou may not need income protection if you:

• Have income protection as a work benefit.
• Could survive on sick pay.
• Have a large amount of savings.
• Get financial support from a partner or family.

Read more about whether income protection is worth it.

What illness does Critical Illness insurance cover? 

Critical illness covers a range of serious, long-term conditions. The full list depends on the insurer, but some examples may include:

• Blindness
• Loss of a limb
• Cancer
• Heart attack
• Organ failure
• Parkinson’s Disease

When choosing a policy, it’s important to find out exactly which conditions are covered. For example, some insurers will only cover cancer in the advanced stages.

Not all illnesses are covered by critical illness insurance and it’s unlikely you’ll be able to claim for conditions that you or a close relative have had previously. However, this is something that should be addressed in the application process.

Whether or not you can claim on your policy also depends on the severity of your illness or incapacity, as you will need to be extremely unwell or severely, permanently disabled to receive a payout. 

Does Income Protection insurance cover illnesses? 

Income protection insurance usually covers a broad range of physical and mental illnesses, as well as injuries, as long as you’re unable to work as a result. But like all plans, some issues aren’t covered.

Like any health-related insurance, there may be exclusions depending on any pre-existing or hereditary conditions. 

How much does Income Protection cost? 

WWith most insurers, the cost of your premiums will depend on:

• Your age
• Occupation
• Health
• How much cover you need
• Your chosen waiting period

Plans are designed to be affordable for workers in all sectors. At Shepherds Friendly, we don’t increase premiums based on your health, hobbies or occupation. Our Income Protection premiums start from only £5 a month.

You can also choose between short-term and long-term cover.

• Short-term plans can be a more budget-friendly way of protecting your income. However, they have a maximum claims period.
• A long-term plan, although more expensive, will often pay out for as long as you need it.

We’ve also answered some common questions on how much Income Protection you  might need. 

When can you claim Income Protection insurance? 

When you can claim depends on your plan. In most cases, there’s a waiting period that needs to pass before you can make a claim. This is also called a deferred period, which can range from day one cover up to 52 weeks.

Some insurers (like us) also offer a one-week deferred period which could be useful for people who don’t get any sick pay. You decide how long your deferred period is when you take out your plan.

The longer the deferred period, the lower your premiums could be.

Be sure to read through our important information and key features for more details. 

In summary

Income protection and critical illness cover are both valuable, but in different ways.

• Income protection provides ongoing, monthly payments if you can’t work.
• Critical illness cover pays a single lump sum for serious health conditions listed in the policy.

The type of insurance you choose could be influenced by your finances, job, and personal preferences. You could even consider having both types of plans, but this would cost more overall.

Please note: No advice has been provided by Shepherds Friendly. If you are in any doubt as to whether a plan is suitable for you, we recommend getting in touch with a financial adviser. Should you consult a financial adviser there could be a cost involved and you should confirm this cost beforehand.