Critical Illness Cover will pay a single lump sum payment in the event that you suffer from a specific critical illness that your insurer has listed as being insurable. The definition of a critical illness is set by the Association of British Insurers (ABI). Some insurers will pay out sooner than the government set definition for some conditions (known as an ABI+ condition).
You can also receive smaller, or part-payments, for less serious conditions such as less advanced stages of cancer or rheumatoid arthritis. It is also common for insurers to cover your children for a part-payment on some policies.
Having a lump sum critical illness payment can be effective to help with things such as adaptations to the home, taking time off work, private or experimental treatment.
Income protection isn’t a single lump sum pay-out. Instead, it provides a monthly payment to replace a portion of your monthly income and it pays you if you are unable to work through accident, illness or injury. The scope is wider because the reason for your inability to work could be from a critical illness or any number of lesser causes.
Typically, the policy will pay out after a waiting period (known as a deferred period). It is up to you to choose the deferred period that suits you. Deferred periods tend to be between 1-6 months depending on personal circumstances. For example, someone who is self-employed may feel that, in the event of an illness, accident, or injury, they would only want to exist on their savings for one month and would then like to have their income protection policy pay out to them. Others, who are employed and would receive sick pay from their employers, choose to have their income protection policy to defer until they stop receiving sick pay from their employer.
The length of time for which an income protection policy will pay is also chosen by you. Many people choose to get covered until retirement age or for the number of years that are remaining on their mortgage. This means that if they never recover from their illness, accident, or injury, they can be assured that they will be paid a monthly amount until the chosen term is reached.
Unlike critical illness cover which pays once, income protection does not end once you make a claim. So, if you claim and then return to work, your policy is still in force. In the event that you suffer an illness, accident, or injury again, you can claim again. If you are unable to work long term, it is usually the case that an income protection policy will pay out significantly more than a critical illness policy would do, and so is often much better value for money.
A real-world example would be:
A 30-year-old IT consultant earning £50,000 per year would pay £26.49 pcm for a £150,000 critical illness policy for 15 years. He would pay £32.04pcm for a £2,000 pcm income protection policy that pays out after 3 months of being unable to work and would pay until age 68 years.
If he were to suffer a stroke and was unable to ever work again, under the critical illness policy he would receive a single lump sum of £150,000. But, under the income protection policy, after three months, he would receive £2,000 per month for the next 38 years until he reached the age of 68. This would mean that he received a total of £906,000 in total.