In this article we will compare income protection insurance to critical illness cover and consider how they can be used together to protect your financial position.
Critical Illness Cover or Income Protection?
Many people ask whether it is more appropriate when considering insuring against ill health to take out income protection insurance or critical illness cover.
We think the confusion arises as many people seem to believe that the two types of insurance do the same job and fulfill the same need. Before considering this in more detail lets just recap on what each type of insurance is and how it works.
Income Protection Insurance
Income Protection Insurance, previously known as Permanent Health Insurance (PHI), is designed to provide the person covered with a replacement income in the event that they are unable to work through accident or ill health. It is not to be confused with ASU (Accident, Sickness and Unemployment) which generally pays out a benefit for a maximum term of 12 months.
After a deferred period (period between telling the life company about the illness and the cover commencing payout) the regular tax-free income is paid to the life assured until the earlier of return to work, death or retirement.
The income can be level or indexed, i.e. it increases each year, either in line with RPI or a fixed percentage, to maintain the real value of the policy.
Critical Illness Cover
Critical Illness Cover (CIC) pays out the sum assured when the life assured is diagnosed as suffering from one of a range of critical illnesses.
Cover is normally provided for a “core” range of illnesses as set out by the Association of British Insurers Statement of Best Practice – covering such illnesses as cancer, stroke, heart attack, kidney failure, major organ transplant, multiple sclerosis and coronary artery bypass surgery.
In addition to this, the majority of policies also cover “additional” conditions such as blindness, coma, loss of limbs, loss of speech, Parkinson’s disease, benign brain tumour, paralysis, terminal illness, third degree burns to name but a few.
The policy can be taken out for a fixed term or whole of life on a single or joint life basis
Income Protection and Critical Illness Cover – complementary policies
To put this into context we need to consider the following basic points of each type of cover: –
1. Income protection = regular income if unable to work through accident or sickness
2. Critical Illness Cover = lump sum payment on diagnosis of one of a number of critical illness conditions.
It is therefore possible to see that depending on the nature and severity of the illness it might be possible for the policyholder to claim one or both policies.
Off work sick – but not critically ill
An illness may be severe enough to prevent you from working (thereby making a claim under the income protection plan) but not one of the listed conditions for claim under the critical illness plan.
Critically Ill but able to return to work after treatment
An illness may be critical e.g. cancer, but not such that in the event of successful treatment of the condition it is feasible that the life assured could return to work after a period of time maybe a year or so – but not long enough to really benefit from making a claim under an income protection plan.
The income protection plan may also provide proportionate benefit in that if the life assured returns to work on a lower salary as a direct result of having suffered their illness they may be entitled to continue receiving some of the benefits payable under the income protection plan
Summary
In conclusion, we would consider critical illness cover and income protection insurance to be complimentary in their nature and therefore it would be wise to consider taking out both types of insurance.
Naturally you should consult an Independent Financial Adviser before purchasing either of these types of insurance as they will be able to research the marketplace for you and make suitable recommendations based on your own particular circumstances.
We would welcome any comments you wish to make below.