What Is The UK's Best Life Insurance In 2024?
Read our 2024 Best Life Insurance UK Guide, get expert advice and compare online quotes from AIG, Zurich, and other top UK insurers...
Life Insurance, Critical Illness Cover and Income Protection are the three pillars of the protection insurance market.
Each product is designed to cover a very different risk, however, so it’s important to understand the difference between them before you make any decisions.
Whether on its own or packaged with Life Insurance, Critical Illness Cover pays out a lump sum if you’re diagnosed with a serious illness.
This is typically used to repay a mortgage or other debt, or to adapt a home in the event of a serious disability.
The main three claims on these policies are for cancer, heart attacks and strokes.
One of the biggest reasons people take out Life Insurance is to cover a mortgage. This ensures their loved ones can remain in the family home if the policyholder dies before paying off the loan.
Other reasons to take out Life Insurance include wanting to make sure the family is financially secure after the death of a breadwinner, to meet an inheritance tax bill or to take care of funeral costs.
Income Protection is a comprehensive sickness insurance policy designed to pay out for anything that medically prevents you from doing your job.
It’s more wide-reaching than Critical Illness Cover, which demands your illness must be one specified in the policy and of a certain severity to be able to claim.
Major claims on such policies are for bad backs and mental health issues; these are by no means critical but can be nonetheless debilitating.
Life Insurance is designed to pay out a cash lump sum if you pass away during the term of the policy. There are two types of Life Insurance: Term Insurance (which is split into Decreasing Term and Level Term Life Insurance) and Whole of Life Cover.
Term Insurance lasts for a set term and then ends. It’s the most common type of Life Insurance and is typically used to cover a mortgage.
Decreasing Term Insurance is suited to straightforward repayment mortgages, where the amount owed falls over time. Here the amount you’re insured for falls alongside your outstanding mortgage balance.
Level Term Insurance is better for interest-only mortgages, where the outstanding mortgage balance remains fixed until the end of the mortgage term.
Level Life Insurance can also be used for family protection, so that you can ensure your loved ones will receive the same benefit if you die in year 1 of the policy as if you died in year 25.
Family Income Benefit is a type of term life cover. Rather than paying out a single lump sum, it pays out a regular and more manageable income to your loved ones to allow them to maintain their lifestyle should you unfortunately pass away.
Whole of Life Insurance, on the other hand, lasts until you pass away, no matter when that may be, providing you keep up with the premiums.
Given the payout is guaranteed, it’s typically used to meet definite costs that will arise on your death, such as an inheritance tax liability or paying for a funeral.
The guaranteed payout means that premiums are typically more expensive than for term assurance.
Couples with joint liabilities, such as a mortgage, often take out Joint Life Insurance. This covers two lives under one policy.
Such policies are typically written on a ‘joint life, first death’ basis, which means the policy pays out on the death of the first partner.
However, this means that after the death of the first partner, the entire policy is void. The second partner is left without any Life Insurance at all.
For this reason, it may be better to consider two single Life Insurance policies, one for each individual. This doesn’t usually cost much more than a Joint Life Insurance policy and you get two payouts, one on the death of each partner.
With Term Insurance, it’s possible to ‘bolt on’ Critical Illness Insurance to offer a more comprehensive level of cover as it will pay out on diagnosis of a critical illness as well as death.
A critical illness can deal just as large a financial blow to a family as a death, so many people find it useful to have both options included. A payout can be used to clear a mortgage or adapt the home to accommodate a disability.
If you meet all the criteria to receive a 100% payout on the Critical Illness element of the policy, then in most cases the policy ceases, leaving you without any Life Insurance and potentially struggling to find a new policy given your recent illness.
Critical Illness Insurance and Income Protection may sound similar to but in fact they’re very different.
While Income Protection is designed to cover you for anything that medically prevents you from doing your job, Critical Illness Cover will only pay out if you’re diagnosed with a serious (i.e. critical) illness.
The three biggest claims on Critical Illness Cover are for cancer, heart attacks and strokes. Other reasons for claiming include multiple sclerosis (MS) and Parkinson’s disease.
To claim on a Critical Illness policy, you have to be ill with a condition specified in the policy. Your policy will also detail the severity of the illness required to make a claim.
This is compared to Income Protection, which will not only pay out for critical illnesses but any other condition that prevents you working.
Michael Barrow
Independent Protection Expert at Drewberry
A typical Critical Illness Insurance policy will cover around 40 conditions, but there are policies on the market that cover fewer than 10 or more than 120, so it pays to read each policy carefully.
Another major difference between Critical Illness Cover and Income Protection is that while Income Protection pays out a regular income (for as long as you need it if you’ve opted for long-term cover), Critical Illness Insurance only pays out once in a lump sum.
This is typically used to repay a mortgage, so there may not be much left over to support day-to-day expenditure if you were too ill to work.
Critical Illness Cover certainly has its place, particularly when combined with Life Insurance and used to protect a mortgage. However, it’s not necessarily the best option to protect your income long-term.
Choosing comprehensive, own occupation and long-term Income Protection policy usually provides better salary insurance.
Samantha Haffenden-Angear
Independent Protection Expert at Drewberry
Income Protection is designed to insure your wages if accident or sickness prevents you from working.
Also known as Accident & Sickness Insurance, it pays out a proportion of your gross (pre-tax) income to cover your core outgoings if you’re unable to do your job.
You’ll receive a monthly income – a long-term policy will pay out for as long as you need it, right up until retirement – to ensure you can keep up with all your daily living expenses while you’re off work.
When the ‘own occupation‘ definition of incapacity is used, the policy will pay out for any illness or injury that prevents you from doing your own specific job.
This is the most comprehensive definition of incapacity and means it’s the easiest to make a successful claim.
Victoria Slade
Independent Protection Expert at Drewberry
Key Differences | Income Protection | Critical Illness Cover |
|---|---|
Pays out a regular income | Pays out a cash lump sum |
Covers a set proportion of your wages | Benefit can be as much as is required to align with your needs |
Typically used to cover everyday expenses | Generally used to repay a mortgage or make home modifications |
Can claim as many times as you need to and, with long-term cover, for as long as you need to | Can only claim once for the full benefit; then the policy terminates |
Most common claims are musculoskeletal (e.g. back pain) and mental health (e.g. stress) | Three most common claims are for cancer, heart attacks and strokes |
A couple would need two separate Income Protection policies | Critical Illness Cover can be taken out jointly with a partner along with Life Insurance |
Benefit is usually, but not always, paid out after a deferred period | Benefit pays out once you’ve met the criteria for a claim |
There are a number of key differences between Critical Illness Insurance and Income Protection.
Which one is right for you depends on your circumstances, but if you’re trying to decide between the two we’d typically recommend Income Protection because it tends to offer more comprehensive cover.
Samantha Haffenden-Angear
Independent Protection Expert at Drewberry
Life Insurance, Critical Illness Cover and Income Protection are the three mainstays of the UK protection market. But do you need all three policies to be adequately protected?
This depends entirely on your circumstances. Where Income Protection and Critical Illness Cover are compared like-for-like for income continuation, Drewberry would usually recommend Income Protection as it provides a more comprehensive and longer-term cover.
However, in some circumstances it may make sense to run these schemes in parallel with each other, perhaps with a small critical illness policy to pay for modifications to a home in the event of a disability. As Income Protection doesn’t pay out a lump sum, there would be no immediate payout if your home needed wheelchair ramps or an accessible bathroom, for instance.
Alternatively, if you don’t have Private Health Insurance you may want a cash lump sum from Critical Illness Insurance to pay for private medical treatment. This may particularly be so in the case of cancer, where often private healthcare providers offer access to new and novel cancer drugs not yet available on the NHS.
It’s very common for people to run Life Insurance alongside Income Protection, but there is no product on the market currently where this can be done as a single policy. You’d need two policies for this level of protection. Most UK Life Insurance providers, on the other hand, will allow you to add on Critical Illness Cover for an extra charge.
Whether or not it makes sense to run Life Insurance, Critical Illness Cover and Income Protection alongside each other depends on your circumstances.
That’s why it pays to speak to an expert who can talk through your needs to find not only the best insurance solution for you but also the most cost-effective.
Michael Barrow
Independent Protection Expert at Drewberry
A financial expert such as one of the team here at Drewberry can assess your needs and steer you towards the best protection insurance for your circumstances.
We can talk through your options and find you the best balance. Obviously having no protection at all isn’t ideal, but at the same time there’s little point over-insuring yourself and paying a great deal of money for too much cover that you may not necessarily need.
We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to let us help.