As doctors or dentists, your whole career is dedicated to caring for patients who have fallen ill or had an accident. Therefore, it can often be easier to see and understand the need for protection, however, when faced with the array of protection options available, it can often feel overwhelming.
Policies such as income protection or critical illness can help protect you and your family’s financial wellbeing when you need it the most.
This article will help you understand some of the differences, and a few common features critical illness cover & income protection share:
Coverage for illness. With each product, you would receive a figure of money in the event that you become ill.
Freedom to use the insurance proceeds. Payments are usually made directly to you, and you can choose to spend the money received from your insurer however you wish.
Tax-free payouts. Payouts for both products are tax-free, except in instances where income protection insurance is part of an employer scheme. In this case, payments are treated as income and taxed as normal.
Exclusions to the policy. Both products generally exclude illnesses arising from alcohol and drugs, illnesses related to pregnancy and sometimes pre-existing conditions. However, all cases are considered on an individual basis.
What are the fundamental differences between the two covers?
1) Critical illness cover pays a tax-free lump sum
Critical illness cover pays a tax-free lump sum if you are diagnosed with a specified medical condition or become totally and permanently disabled during the term of the policy.
The plan will only pay out once, and is often used to cover specific expenses, such as paying off one’s mortgage. However, they can also be used for different objectives, such as helping with school fees or covering potential pension shortfalls.
2) Income protection pays a regular monthly income
Income protection pays a regular tax-free monthly income if you are incapacitated and unable to work due to accident, illness or injury.
Income protection is usually designed to ensure your monthly outgoings are protected so that in the event of being unable to work your standard of living is supported.
You can make multiple claims while covered by income protection.
3) Level of cover
- Income protection is based upon a percentage of your income. Plans usually pay out between 50% and 70% of your gross (pre-tax) monthly earnings.
- Critical illness cover however, does not have to be based upon your income. This allows you to be more flexible when deciding on the level of cover to meet your needs.
4) Scope of Cover
- In theory, income protection can cover all medical conditions* and accidents that render you unable to work.
- The number of critical illness cover conditions covered varies between providers but are often more limited than income protection.
5) Both are complementary – not competing
Income protection and critical illness cover are both valuable products and should therefore be seen as complementary not competing.
For instance, some of the most common reasons that individuals have to take time off work could be for mental health issues or musculoskeletal problems. These instances would not meet the requirements for a critical illness claim but can be supported by income protection.
and finally…
Are you self-employed?
For the self-employed, income protection is especially important as one does not have the safety net of an employer’s sick pay.
Your health and your ability to work are your greatest assets so make sure you protect them. Navigating through how to protect you and your family financially is different for everyone. Your adviser will be happy to talk through protection with you, so please get in touch. After all that’s what we are here for!
Do you think a protection policy is vital? Let us know by adding a comment below.
* Dependent on pre-existing conditions after underwriting.