Self Employed Income Protection or Critical Illness Cover?

Income Protection Covers More Conditions

One of the greatest advantages Income Protection Insurance has over Critical Illness Cover is that it covers a lot more conditions.

Critical Illness Insurance will cover only a set number of health conditions laid out by the insurance provider – this can range anywhere from less than 10 to over 100 conditions.

If your condition isn’t on the list you can’t make a claim, even if it stops you working.

Some less serious conditions that aren’t typically included on Critical Illness Insurance include bad backs and mental health conditions, which are by no means critical but can nonetheless be debilitating.

However, such conditions represent some of the most common claims on an Income Protection policy.

Income Protection will cover any health problem (providing it didn’t pre-date you starting the policy) and, with Long-term cover, pay out as long as the health issue prevents you from working.

Moreover, with the best definition of incapacity – own occupation cover – you’ll be able to claim for any health problem that stops you from working in your own job specifically.

Another notable issue is that Critical Illness Cover will not always cover less severe versions of some of these conditions. A ‘minor’ heart attack may not meet the insurer’s definition and therefore not be covered, even if it prevents you from working.

In the case of a heart attack, you have to have one of a specific severity as diagnosed by a medical professional to be able to make a successful claim.

For more minor variants of covered conditions, Critical Illness policies sometimes offer a proportional benefit from 25% of the sum assured upwards. This is deducted from the total ‘pot’ you’re covered for.

Income Protection Provides Income Over a One-Time Payment

Critical Illness Insurance pays out a lump sum if you’re diagnosed with a serious health condition. This lump sum might be used for:

• Covering outstanding loans, such as a mortgage
• Adapting your home to accommodate a disability
• Affording private medical care for your newly-diagnosed condition.

While this lump sum might sound tempting and appear to be a lot of money, especially if your policy covers your outstanding mortgage for hundreds of thousands of pounds, the reality is that it’s a finite sum.

If it’s linked to your mortgage and you repay the loan in one go after receiving a payout, there might be no money left to live on if you still can’t work.

What Income Protection does is provide more support for you and your family during a period of poor health.

This is because, as opposed to paying out a large amount only once, Income Protection will pay out what you need to cover your financial commitments on a regular monthly basis.

If you opt for Long-Term Income Protection, you’ll receive this monthly income right up until retirement if you can never work again.

Income Protection Allows Multiple Claims

One of the main disadvantages of Critical Illness Cover is that it will only ever pay out once if you’re ill enough to receive the entire benefit.

This means that your policy will end after you have claimed the full amount and you will be left without cover.

If you still want cover after having made a claim, you’ll need to reapply for a new policy being older and having suffered a critical illness, making cover far more expensive.

Income Protection Insurance, on the other hand, has no limits to the amount of times you can claim. Your policy will last until you reach your chosen cease age (usually retirement) or stop paying premiums. Any time before then, you can make a claim and receive benefits to cover your income.

If you’re unfortunate enough to suffer several instances of poor health preventing you from working at different points in your career, you can claim for each period you’re out of work with an Income Protection policy.

What’s more, if you opt for guaranteed premiums from the outset of the policy, this means the insurer can’t raise monthly premiums if you make a claim, unlike some other insurances where making a claim will see a spike in your premiums the following year.

It’s Easier to Tailor the Cost of Income Protection

The cost of Income Protection and Critical Illness Insurance can vary depending on your circumstances and the cover you want from your policy.

However, one of the benefits of Income Protection is that there are certain policy options that can keep premiums in check.

There are far fewer such options with Critical Illness Cover, where the only things that will majorly impact the price of your insurance are your health and smoker status (which you can’t change) and the amount of cover you need (which, if you need to cover your full mortgage, is also difficult to cut).

With Income Protection, however, there are a variety of different ways you can adjust the policy to lower the cost:

• Your deferred period
  This is the period of time between leaving work due to illness and being able to claim your first insurance benefit. The longer the deferral period the cheaper your cover.
• Your cease age
  This is the age the policy ceases, typically the age you expect to retire. Lowering this can reduce the cost of your cover.
• Your benefit amount
  This is how much you’ll receive from the insurer each month. If appropriate, covering just your core outgoings rather than the full amount you’re able to insure can lower the cost of cover.

If you have enough savings to last a few months out of work without claiming, setting a longer deferred could reduce the cost of your Income Protection by as much as 40%. This is something you can’t do with Critical Illness Cover.

Income Protection is Long-Term

One of the best things about long-term self employed accident and sickness insurance is that there is no limit to the length of the claims you can make.

This means that if you have a health problem that takes you out of work for years at a time you can claim Income Protection benefits for as long as you need them and right up until the policy’s cease age.

Long-term Income Protection will pay out until either you’re ready to go back to work or you retire, helping you cover your everyday expenses over a longer period.

Example

Imagine you had a £200,000 payout from a Critical Illness policy but were so ill you couldn’t work for the next 20 years.

This would only equate to £10,000 a year to live on from the payout, or less than £1,000 per month, which simply wouldn’t be sufficient for most people.

That’s assuming you haven’t used the whole Critical Illness Insurance payout to cover your mortgage, in which case the money wouldn’t be available to live off at all.

Income Protection can support you with monthly benefits worth up to around 65% of your pre-illness income over the long-term, which can make it a far better option for supporting yourself in the long-term if you can’t work.

Company Directors Can Opt for Their Business to Pay for Income Protection

If you’re self-employed as a contractor or company director working through your own limited company, you have the option of Executive Income Protection.

Income Protection for Contractors is a policy that’s owned and paid for by your business, with premiums typically being a tax-deductible business expense.

In the event of a claim, the payout goes back into the business and you distribute it from there in a tax-efficient manner.

It’s not a P11D or benefit in kind, so there’s no additional tax to pay on the policy just for having it in place.

You can’t pay for full Critical Illness Cover through your limited company as it hasn’t been approved by HMRC as a business expense, so Income Protection is the sole way to protect your income tax-efficiently through your company.

Get Critical Illness and Income Protection Advice

Whether or not Income Protection or Critical Illness Cover will provide the best protection for your needs will depend entirely on your circumstance, but either way it is important to understand the differences.

Why Speak to Us…

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.

• There is no fee for our service
• We are independent and impartial
  Drewberry isn’t tied to any insurance company, so we can provide completely impartial advice to make sure you get the most appropriate policy based solely on your needs.
• We’ve got bargaining power on our side
  This allows us to negotiate better premiums for you than you going direct yourself.
• You’ll speak to a dedicated expert from start to finish
  You will speak to a named expert with a direct telephone and email. No more automated machines and no more being sent from pillar to post – you’ll have someone to speak to who knows you.
• Benefit from our 5-star service
  We pride ourselves on providing a 5-star service, as can be seen from our 3900 and growing independent client reviews rating us at 4.92 / 5.
• Gain the protection of regulated advice
  You are protected. Where we provide a regulated advice service we are responsible for the policy we set-up for you. Doing it yourself or going direct to an insurer won’t provide this protection, so you won’t benefit from these securities.
• Claims support when you need it the most
  You have support should you need to make a claim. The most important thing when it comes to insurance is that claims are paid and quickly. We are here to support you during the claims process and make sure it’s as smooth and stress free as possible.

If you are not sure where to turn and need some help then please do not hesitate to get in touch.

Pop us a call on 02084327333 or email help@drewberry.co.uk.

Michael Barrow
Independent Protection Expert at Drewberry