TL;DR
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- Protection insurance covers three main risks: death (life insurance), serious illness (critical illness cover), and inability to work (income protection).
- Life insurance: term cover pays a lump sum if you die within the fixed term. Whole of life pays whenever you die.
- Critical illness cover pays a tax-free lump sum on diagnosis of a specified serious illness such as cancer, heart attack, or stroke.
- Income protection pays a monthly benefit if you cannot work due to illness or injury: typically 50% to 70% of pre-illness income.
- A whole-of-market protection adviser can compare all available products and recommend the most appropriate combination.
- Most protection policies are underwritten: health questions determine the premium and any exclusions.
Key Facts
What Is Protection Insurance?
Protection insurance is the umbrella term for a family of products designed to protect individuals and families against financial hardship arising from death, serious illness, or inability to work. The three core products are life insurance (which pays on death), critical illness cover (which pays on diagnosis of a serious illness), and income protection insurance (which pays a monthly benefit when illness or injury prevents working). Each product addresses a distinct financial risk and the appropriate combination depends on individual circumstances, financial commitments, and existing provision through employment or the state.
Life Insurance
Term life insurance pays a lump sum if the policyholder dies within the fixed term of the policy. It is the most cost-effective way to provide a large death benefit during the period when financial dependants are present and the mortgage is outstanding. A 30-year-old non-smoker in good health can obtain 200,000 pounds of level term cover over 25 years from approximately 8 to 15 pounds per month depending on the insurer and the underwriting outcome. Decreasing term policies, where the cover reduces in line with a repayment mortgage balance, are typically cheaper than level term.
Whole of life insurance pays whenever the policyholder dies, with no fixed term. The payout is guaranteed provided premiums are maintained. Whole of life premiums are significantly higher than equivalent term cover because the insurer knows with certainty that a claim will eventually be made. Whole of life is used primarily for inheritance tax planning and leaving a guaranteed inheritance.
Critical Illness Cover
Critical illness cover pays a tax-free lump sum on confirmed diagnosis of one of the serious conditions listed in the policy. Cancer, heart attack, and stroke account for approximately 80% of all UK critical illness claims. A comprehensive policy covers 40 to 100 or more conditions. The lump sum can be used for any purpose: clearing the mortgage, funding private treatment, adapting the home, or replacing lost income during recovery.
The definitions of each condition in the policy determine whether a specific diagnosis triggers a claim. Policies using ABI model definitions use standardised language across providers. Some conditions, such as early-stage cancers, may not trigger a payout under restrictive policy definitions. A whole-of-market protection adviser can compare policy definitions across providers rather than just comparing headline premiums.
Income Protection Insurance
Income protection insurance pays a monthly benefit if the policyholder cannot work due to illness or injury. The benefit is typically 50% to 70% of pre-illness gross income and is paid tax-free. Two key policy features determine the cost and the benefit: the deferred period and the benefit period. The deferred period is the waiting time between the start of incapacity and the first payment, commonly 4, 8, 13, or 26 weeks. A longer deferred period reduces the premium. The benefit period is how long payments continue: short-term policies pay for 1 to 2 years; long-term policies pay until the policyholder recovers, retires, or reaches state pension age.
Income protection is arguably the most underused protection product in the UK. Statutory Sick Pay pays only 116.75 pounds per week for up to 28 weeks. Many employees have employer sick pay that supplements this for a period but employer sick pay entitlement eventually runs out. For self-employed people with no employer sick pay, income protection is often the most important protection product of all.
Frequently Asked Questions
What is the difference between life insurance and critical illness cover?
Life insurance pays on death. Critical illness cover pays on diagnosis of a specified serious illness while the policyholder is alive. They address different risks and are often purchased together. A combined life and critical illness policy pays once on whichever event occurs first.
What is income protection insurance?
A policy that pays a monthly benefit if you cannot work due to illness or injury. The benefit is typically 50% to 70% of pre-illness income and is paid tax-free. It continues for the benefit period (short-term or to retirement age) or until you recover and return to work.
How much does income protection cost?
Premiums depend on age, health, occupation, benefit amount, deferred period, and benefit period. A 35-year-old in an office-based occupation insuring 2,000 pounds per month with a 13-week deferred period to age 65 typically pays 30 to 60 pounds per month. Higher-risk occupations and shorter deferred periods increase the premium.
Do I need all three types of protection insurance?
Not necessarily. The appropriate combination depends on your financial commitments, dependants, employment benefits, and existing savings. A mortgage holder with dependants and no employer sick pay has different needs from a debt-free single person with generous employer benefits. A whole-of-market adviser can assess the specific need and prioritise the most important covers.
