Income protection vs critical illness cover
Both income protection and critical illness insurance provide financial support if your health takes a downturn, but they work in very different ways. Understanding the distinction helps you decide whether you need one, the other, or a combination of both to protect your finances effectively.
How income protection works
Income protection pays a regular monthly benefit if you can’t work because of illness or injury. Payments continue until you recover, your chosen benefit period ends, or you reach retirement age. Executive policies, designed for limited company directors, can insure up to around 80% of your combined salary and dividends, while personal policies usually cover up to 65% of income. If paid through your company, the premiums are typically treated as a business expense and can reduce your Corporation Tax bill.
Because income protection is designed to replace earnings rather than pay off debts, it’s often described as the foundation of financial security — providing ongoing support for as long as you’re unable to work. You can choose short-term or long-term cover depending on how much protection you want and what you can afford.
How critical illness cover works
Critical illness cover pays out a single tax-free lump sum if you’re diagnosed with a serious medical condition defined in your policy — commonly cancer, heart attack, or stroke. Some plans also include other major illnesses such as multiple sclerosis or organ failure. The payout is made once and can be used however you choose: repaying a mortgage, funding private medical treatment, or giving you breathing space to focus on recovery.
Unlike income protection, it doesn’t provide a regular income, and once the lump sum has been paid the policy usually ends. Critical illness insurance therefore suits people who want a one-off safety net for large expenses, rather than ongoing monthly income replacement. The Association of British Insurers (ABI) provides a clear overview of how critical illness cover works and what conditions are typically included.
Key differences
- Type of payout: Income protection provides an ongoing monthly benefit while you’re unable to work; critical illness pays a one-time lump sum.
- Trigger for payment: Income protection pays for almost any medical condition that prevents you from doing your own job (subject to exclusions). Critical illness cover only pays if you’re diagnosed with one of the specified conditions listed in the policy wording.
- Duration: Income protection benefits can continue for months or even years, depending on the policy term. Critical illness cover pays once and then ends.
- Tax treatment: Critical illness payouts are always tax-free. Income protection benefits are tax-free for personally funded plans but are taxable if paid to your company under an executive policy.
- Purpose: Income protection replaces lost earnings to cover day-to-day living costs, while critical illness cover is more suited to clearing debts, paying for treatment, or making lifestyle adjustments.
Many limited company directors and professionals choose to hold both types of policy. A critical illness plan can provide an immediate financial cushion at the point of diagnosis, helping you manage larger expenses, while income protection ensures you have an ongoing income stream if recovery takes time. Used together, they create a more complete safety net for you and your family.
If you’re unsure which cover fits your circumstances, it’s worth discussing both with a regulated financial adviser. They can assess your earnings structure, existing sick pay arrangements, and financial commitments to find a mix of policies that offer the right level of protection for your business and personal finances. You can also get a quote to compare costs from leading UK insurers.