Income protection and critical illness

Critical illness and income protection insurance policies can help to ensure you have an adequate financial safety net in place if you were to fall seriously ill, become disabled or have an accident.

Developing a disability, becoming seriously ill, or having an accident can be unexpected life events you hope never to experience. However, there is a chance you could be impacted by one of the above in your lifetime, particularly as you age.

It can be prudent to make allowances in your financial plan for these potential scenarios, particularly as they can have a significant financial impact. To help you understand the benefits of financial protection, we provide an overview of both income protection and critical illness cover and explain what it means to have a plan in place.

Financial responsibilities

If you are unwell and need to spend time away from work, it is likely you will stop earning at a time where your financial needs may be greater than ever.

The state benefits usually received can be relatively low and rarely provide sufficient income to meet your needs. This is particularly important if you have substantial outgoings or dependants to support financially. You may also need capital to make adaptations to your home or to pay off debt.

A rainy-day fund can help in the short term, but it is not a complete solution for long term illness. The amount required for an emergency fund can vary from person to person, but as a minimum three to six months’ expenditure is the general advice.

It is important to consider what might happen to your finances if you needed to stop working for health reasons, and how available insurances can provide you with some added security.

Income protection

Income protection insurance, sometimes called permanent health insurance, pays a weekly or monthly income if you cannot work because of illness or disability after a set period of time has passed (known as a deferred period).

You can generally be insured to receive a monthly benefit of up to between half and two-thirds of your pre-tax income. If you have no income, you may still be able to take out a policy but the maximum pay-out will be restricted. This is generally limited to an income of around £20,000 a year.

Some employers provide income protection insurance, but be mindful that not all do. Employers are only legally obliged to pay employees in the form of statutory sick pay for the first 28 weeks of being unable to work because of an illness or injury. It is important to check your particular position with your employer.

Even if you do receive some kind of income protection through work, it can be precarious to rely solely on it. Your cover would be lost if you changed employment or were made redundant. This is particularly important if this happens at an older age when cover would be harder and more expensive to obtain.

When applying for cover, insurers will take into account your personal circumstances, medical history and occupation. All of these may impact your eligibility, lead to policy exclusions or increase the premium of the policy. Those with a history of health issues or more hazardous occupations are more likely to be affected. Some providers may also decide against insuring you if they deem the risk to be too great.

Critical illness insurance

Critical illness insurance pays a lump sum if you are diagnosed as suffering from a specified illness. The number of conditions covered varies by provider but may include serious cancers, heart attack and stroke. One of the drawbacks of this type of insurance is that not all conditions are covered. A financial planner can help to provide information on what would be the most suitable policy for you and your particular circumstances.

An advantage of critical illness insurance is that the benefit is usually paid shortly after diagnosis, unlike the typically longer waiting time for income protection. It is also paid in the form of a lump sum that can allow you to make rapid adjustments to your lifestyle and pay off loans.

Critical illness insurance is often more expensive than life insurance, as the chances of developing a critical illness at a working age is higher than death. Standalone critical illness policies are quite rare, with critical illness often taken out as part of a life insurance and critical illness policy.

Protecting your family and future

Having financial protection policies in place can help to provide peace of mind for you and your loved ones should the worst happen. Different types of protection policies provide different benefits, and multiple protection policies can be taken out to complement each other. Support from a financial planner can help you to find the right combination that suits your particular needs.

If you would like to discover more about different protection policies and which is right for you, you can contact our team of professional advisers.

The information contained within this document is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
Tax treatment depends upon individual circumstances and is based on current UK tax legislation, that is subject to change at any time.
The opinions stated in this document are those of the author and do not necessarily represent the view of Progeny and should not be relied upon to make a financial decision.
If you are unsure about the suitability of otherwise of any product or service, we recommend that you seek professional advice.


This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

Matthew Liver

Chartered Financial Planner

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