What is the difference between life insurance, critical illness cover and income protection?
They pay out in three different circumstances, and people frequently buy one believing it covers another.
Life insurance pays a lump sum when you die (or, on some policies, on terminal diagnosis). It protects the people who depend on your income or who would inherit a debt.
Term life covers a fixed period — often matched to a mortgage or until children are independent — and pays nothing if you survive the term. It is comparatively cheap. Decreasing term reduces the sum alongside a repayment mortgage. Whole of life covers you until death and costs substantially more.
Critical illness cover pays a lump sum on diagnosis of a specified serious condition — commonly cancer of a defined severity, heart attack, stroke, multiple sclerosis and others. The key features:
It pays on diagnosis, not on inability to work. You can be diagnosed, recover fully, return to work, and keep the money.
The definitions are specific and matter enormously. Policies list conditions and the severity required. A diagnosis that sounds serious may not meet the policy's definition, and this is where most disputes arise. Compare definitions, not just price.
Income protection pays a regular monthly income if you cannot work due to illness or injury, usually until you recover, retire, or the term ends.
It is the one most financial advisers regard as most commonly under-bought, because inability to work is far more likely than death during working age, and most conditions causing long absence are not on a critical illness list — back problems and mental health conditions being the largest categories.
Key variables: the deferred period before payments start, which strongly affects cost; whether it is own occupation or a weaker definition; and whether payments are guaranteed to term.
Check what your employer provides before buying, and note that life cover in trust can avoid inheritance tax delays.