When it comes to safeguarding your financial future in the UK, choosing the right type of insurance is important. Life insurance, critical illness cover, and income protection may seem similar but each serves distinct purposes. Understanding these differences can help you make an informed decision. Here, we’ll break down each option, explore their benefits, and discuss how to determine the best fit for your needs.
Life Insurance
What is it?
Life insurance is a policy that pays out a tax free lump sum to your beneficiaries if you pass away during the term of the policy. This type of insurance is designed to provide financial support to your loved ones and can be used for any expense such as mortgage payments, funeral costs, and/or living expenses.
Types of Life Insurance:
- Term Life Insurance: Provides coverage for a specific period, such as 10, 20, or 30 years. If you pass away within this term, the policy pays out. There are three types of terms you can choose from: Decreasing term, increasing term and level term.
- Whole of Life Insurance: Covers you for your entire life and pays out at the time of your passing away. To receive the full benefit of this type of insurance, your premiums should be paid up to date without arrears.
Cost factors include: age, health, lifestyle, occupation, length of cover, smoker status, family medical history, and amount of cover.
Who should consider it?
- Parents: To ensure your children are financially secure in the event of one or both parents passing away.
- Homeowners: To cover outstanding mortgage debts or contribute to ongoing mortgage payments.
- Supporting dependents: Provide financial stability for those who rely on your income including your parents, partner and children.
- Anyone liable for inheritance tax: If your estate is liable for inheritance tax, insurance payout can be used to pay it off.
Read more about life insurance here: Benefits of Life Insurance Cover
Critical Illness Cover
What is it?
Critical illness cover pays out a lump sum if you’re diagnosed with a serious illness listed in the policy. Conditions typically covered include cancer, heart attack, and stroke. The payout can be used to cover medical bills, make essential home modifications, provide financial support during recovery or anything else that you may see necessary to continue your lifestyle.
Cost factors include: age, health, family medical history, whether you’ve had pre-existing medical conditions and smoker status.
Who should consider it?
- Individuals with dependents: To ensure they have financial support if a critical illness affects your ability to work.
- Those with a history of family illnesses: Those with potential hereditary conditions.
- Anyone seeking peace of mind: Critical illness cover can alleviate financial stress in case of a serious health issue.
Read more about critical illness here: Critical Illness cover
Income Protection
What is it?
Income protection insurance provides a regular income if you’re unable to work due to illness or injury. Unlike critical illness cover or life insurance, it doesn’t payout a lump sum but offers ongoing payments, usually a percentage of your salary until you decide to retire or until the policy term ends. The payout can be used for anything including living expenses, mortgage bills and medical expenses.
Cost factors include: age, health, type of job, deferred period (a period you choose to wait from when you lose your income to when you make a claim)
Who should consider it?
- Self-employed individuals: To ensure a steady income if you lose your ability to work because of an illness or injury.
- Those who are out of work for a long period: Income protection can supplement income when the period of sick pay comes to an end or when it doesn’t cover total costs, particularly medical bills.
- Those with financial commitments: To cover living expenses such as rent or mortgage, and daily expenses.
- Those without savings: Acts as a financial safety net when you don’t have statutory sick pay or enough savings to fall back on.
Read more about income protection here: Income protection in the UK
Choosing the right option
Deciding which type of insurance suits you depends on your circumstances, financial obligations, and priorities. Here are some factors to consider:
- Financial dependents: If you have family members who rely on your income, life insurance can provide them with essential financial support. It can also be set up as a fund for funeral costs or inheritance taxes.
- Major Health concerns: If your family has a history of critical illnesses, you could put critical illness cover in place to offer you peace of mind if you were to end up in a similar position family members may have been in. It's important to note, some conditions may be excluded from the policy. The lump sum payout can be used to make adjustments to support you from medical costs to home essentialities.
- Employment situation: If you are self-employed, lack sufficient savings or your employee benefits won’t cover loss of income, income protection could be invaluable. The ongoing payment is meant to give you financial support when you lose your income for longer periods. This can help you focus on recovery until you can return to work.
While critical illness cover alone can also help you with your income, it doesn’t cover a wide range of illnesses or minor injuries like income protection does. The lump sum may not be sufficient to support long periods of loss of income.
Conclusion
Each type of insurance plays a crucial role in protecting your financial future. Whether securing your family’s future with life insurance, protecting yourself from the financial impact of a serious illness, or assuring income continuity, the right insurance can offer peace of mind and financial security. You can choose a combination of policies to provide comprehensive coverage.
In the UK, the availability of these insurance products and the specific conditions covered can vary, so it’s important to carefully review the terms and conditions of each policy.
* Approved by The Openwork Partnership on 16 Aug 2024
