Life Insurance, Income Protection and Critical Illness: What Do You Need?

Protection insurance is the foundation of any financial plan, yet it is often overlooked. If your income stopped tomorrow due to illness, injury, or death, would your family be financially secure? This guide covers the three main types of protection and helps you work out what you actually need.

Life Insurance

Life insurance pays out a lump sum or regular income if you die during the policy term. The two main types are:

• Term life insurance — covers you for a set period (e.g. 20 or 25 years). If you die during the term, it pays out. If you survive the term, there is no payout. This is the most affordable type.
• Whole-of-life insurance — covers you for your entire life, so a payout is guaranteed. More expensive than term insurance and often used for IHT planning.

Term insurance can be level (payout stays the same), decreasing (payout reduces over time, often used to match a repayment mortgage), or increasing (payout rises with inflation).

How much cover? A common guideline is 10 to 15 times your annual income, plus enough to clear any mortgage or significant debts. If you have dependent children, factor in years until they are financially independent.

Income Protection

Income protection (sometimes called permanent health insurance) pays a regular income if you cannot work due to illness or injury. It typically pays up to 50-65% of your pre-tax income and continues until you recover, reach retirement age, or the policy ends.

Key features to understand:

• Deferred period — the waiting period before payments start (typically 4, 8, 13, or 26 weeks). Longer deferred periods mean lower premiums.
• Own occupation vs any occupation — “own occupation” pays out if you cannot do your specific job; “any occupation” only pays if you cannot do any work at all. Own occupation is more expensive but far better cover.
• Guaranteed premiums — some policies guarantee premiums for the life of the policy; others can be reviewed and increased

Income protection is arguably the most important type of protection insurance. You are far more likely to be unable to work due to illness than to die during your working years.

Critical Illness Cover

Critical illness insurance pays a one-off tax-free lump sum if you are diagnosed with a specified serious illness during the policy term. Common covered conditions include cancer, heart attack, stroke, and multiple sclerosis.

Key differences from income protection:

• Pays a single lump sum rather than ongoing income
• Only pays for listed conditions — check which conditions and at what severity are covered
• Once it pays out, the policy ends
• Generally more expensive than income protection for the same premium level

Critical illness cover can be useful for clearing a mortgage or providing a financial cushion during treatment and recovery. It is often combined with life insurance in a single policy.

What Does Your Employer Provide?

Before buying cover privately, check what your employer already provides:

• Death in service — many employers offer 2-4 times salary as a lump sum life insurance benefit
• Group income protection — some employers provide income protection, though it may only cover a proportion of salary
• Sick pay — Statutory Sick Pay (SSP) is around £117 per week for up to 28 weeks (check GOV.UK for the current rate). Many employers offer enhanced sick pay, but it typically runs out after 3-6 months.

Employer cover is useful but has limitations: it disappears when you leave the job, and death in service benefits may not be enough for your family’s needs.

Getting the Right Cover

When arranging protection:

• Write life insurance into trust — this keeps the payout outside your estate for IHT and means it reaches your family faster (no probate delay)
• Review regularly — life events like marriage, children, or a new mortgage may mean your cover needs updating
• Disclose honestly — failing to disclose medical history or lifestyle factors (smoking, high-risk hobbies) could invalidate a claim
• Shop around — premiums vary significantly between providers for similar cover. A whole-of-market broker can help find the best deal.