Income protection vs Critical illness?
Critical illness cover and income protection are both designed to pay you a set amount of money if you are either ill or deemed critically ill, depending on the policy, but is one better than the other, and if so why?
Quick answer
Business income protection is generally less expensive, has the benefit of being fully tax-deductible as a business expense, covers a much more comprehensive range of conditions and is much more likely to be used than a personal critical illness policy, making it my favourite go-to for company directors and key employees.
However, if the insured does not have private medical insurance, a critical illness policy has the advantage of providing a lump sum of money that could be used to access specialist private medical treatment in the event of being critically ill.
Therefore, if you have private medical insurance in place, I believe an income protection policy to be a better option.
Read on to find out how we have come to this conclusion.
Critical illness policy
Critical illness is a policy that will pay you a lump sum of money if you meet the insurer’s criteria of being critically ill. In most cases, this falls into around 50 or so conditions of a certain severity to qualify. If you have a qualifying critical illness, the policy will pay out a lump sum and will then cease.
The main scenarios where this kind of policy could be helpful will be if you do not have private medical insurance. You may wish to use the lump sum to seek specialist private medical care in the event of a critical illness.
Other uses would be to settle a mortgage and help reduce your overheads as you may not continue to work.
Income protection policy
Income protection is a policy that will pay out simply if you are unable to work. This can be for a wide range of reasons such as general illness, back problems and stress, making the policy much more likely to pay out at some point in the term of cover.
A scenario for this cover might be you have an accident and are away from work for several months. The policy pays out up to 70% of your regular income each month, including dividends, allowing you to keep on top of your regular bills, such as mortgage payments and other outgoings. Once you have recovered and are back at work, the payments stop. However, the policy remains in force in case you need to use it again in the future.
Comparing to two
In most events that would qualify for a critical illness claim, likely, you would also be off work or have been signed off work by your doctor, meaning an income protection policy would also qualify. Therefore, both policies would be beneficial in these circumstances. The amount received would be different, a lump sum for critical illness instead of a monthly amount with income protection.
However, a critical illness cover would not apply for many more conditions such as stress, general illness or accident, whereas income protection would. As these events are much more likely than developing a critical illness, the likelihood of using an income protection policy over a critical illness policy is much higher. It can provide the insured with a broader range of cover.
Which is more expensive?
Based on a 40-year-old male company director, a non-smoker, a life and critical illness policy of £250,000 would cost £117.17 per month.
An income protection policy that pays out £2,750 a month would cost £76.71 per month. (policy based on eight week deferral period and income until age 65)
Qualifying for business expense?
As a company owner, you should be looking to claim as many expenses as possible through your business. Business income protection is classed as an expense and therefore gets full corporation and income tax relief.
On the other hand, critical illness doesn’t qualify and can only be obtained as a personal policy. This means that even though premiums may appear to be £117.17 a month in the example above, once you consider the corporation tax and dividend tax you needed to pay to get that £117.167 in your hand, the actual cost to the business would be £214.30.
This makes critical illness cover much more expensive than income protection.
There is one caveat to this. One insurer in the UK can offer a policy that covers ‘significant employee illness’, a hybrid of critical illness that can be claimed as a business expense, making some significant tax savings. Significant employee illness covers 28 possible conditions that would qualify, rather than the usual 50 offered with critical illness. All of the same significant events are covered, such as advanced cancer and heart conditions. However, the lesser conditions such as the loss of sight, hearing or limbs are not covered.
Using the same scenario above, life and significant employee illness cover of £250,000 would cost £105.39 per month until age 65, with the added advantage of the premium qualifying as a business expense making it fully tax-deductible with no benefit in kind tax
Conclusion
Business income protection is generally less expensive, has the benefit of being fully tax-deductible as a business expense, covers a much more comprehensive range of conditions and is much more likely to be used than a personal critical illness policy, making it my favourite go-to for company directors and key employees.
However, if the insured does not have private medical insurance, a critical illness policy has the advantage of providing a lump sum of money that could be used to access specialist private medical treatment in the event of being critically ill.
Therefore, if you have private medical insurance in place, I believe an income protection policy to be a better option.
If you are wondering which policy would be suitable for you, let’s talk.
