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Income protection and life insurance could be considered two sides of the same coin. One which can help you and your family survive whilst you’re alive, and one is for your family after you’ve passed away.
That coin could also be representative of your career. You may be thriving on one side or trying to reach the next rung of the ladder on the other. However, things happen, and life is short. If something happens to you, how will you support yourself and/or your family during this period?
You don’t need to flip that coin or leave it up to chance to determine which product is best for you. You may find one product is more suitable to your needs than the other, or that both will make you feel fully protected. Read on as we look at the key differences between life insurance and income protection, and which product is best for you.
What is life insurance?
Life insurance is a product that provides a cash lump sum to your loved ones or beneficiaries once you pass away. You can choose a sum assured (pay out sum) that your family would receive and, in return, you pay a monthly instalment (or premium) for the policy protection.
Many people take out life insurance to ensure their family could continue financially after they’re gone. Popular reasons for taking out cover include paying off the mortgage, covering funeral expenses and helping family transition into a life without them, by covering day-to-day costs.
The two core life insurance products are term-based life insurance, and whole of life insurance (life assurance).
Term based life insurance will cover you for a defined period (usually up to 40 years). The sum assured can either be a fixed amount (level term life insurance) or decrease over the length of the policy (decreasing term life insurance).
If you pass away during the policy term and, under the providers conditions, your family/beneficiaries will be entitled to the pay out. However, if you pass away after the term, a claim can’t be made. Life assurance, also known as whole of life insurance, lasts until the policy holder dies, regardless of when that is. Because of the guaranteed nature of the product, premiums are significantly higher.
Life assurance can also be purchased in the form of over 50s life insurance – also known as a guaranteed over 50s plans. These polices provide lifelong cover and a guaranteed pay out (like whole of life insurance), but are solely for UK residents aged between 50 – 85.
Unlike other policies, no medical information is required, meaning acceptance for this age bracket is guaranteed. However, the trade off to this, is that the maximum sum assured is substantially lower than that of other life insurance products. All life insurance premiums are fixed for the length of the policy unless stated otherwise by the provider.
What is income protection?
Income protection is designed to substitute your monthly income if you’re unable to work due to illness or injury. You could receive up to 70% of your usual earnings to help you and your family cover key expenses, while providing you with the time to recover or rehabilitate.
The primary purpose of income protection is having a safety net to stop you and your family falling into unmanageable debt. This is done by paying a monthly instalment to you to mimic your monthly pay. This can help you to keep up with your mortgage or rent payments, and essential bills, until you’re able to work again.
With income protection the pay out won’t be made straight away, unlike life insurance. Income protection policies have what’s known as a deferred period.
The deferred period is a chosen amount of time where you must still be off work with your illness or injury before being eligible for the funds. This can range from 4 to 52 weeks, with many people choosing to coincide this with their sick pay benefits or savings. An income protection policy may have different definitions of incapacity when it comes to accepting a claim.
- Own occupation allows you to claim if you cannot complete your specific job.
- You can claim on a policy with a definition of occupation incapacity if you’re unable to work at all.
- Suited tasks claims are successful if your illness or injury prevents you from doing your job, or another job which utilises your experience and skillset.
What isn’t covered on both income protection and life insurance?
It’s always best to check the terms and conditions of any product you have interest in. Both policies will usually have a set list of things that are not covered.
With both income protection and life insurance, if you’re no longer paying the premiums for your policy, you won’t be able to make a claim. Anything self-inflictive, resulting in injury, illness or death, will also not be covered.
Misuse of alcohol and drug addiction could automatically terminate your policy due to the health issues which could arise. Furthermore, purposefully completing the application form inaccurately – like missing relevant medical information – leads to “non-disclosure” which could result in unsuccessful future claims and policy termination.
Death is not covered on income protection, while illness and injury is not covered on life insurance, unless there is a specific critical or terminal illness clause.
With both income protection and life insurance there are certain situations that won’t be covered. For this reason, it’s important to always check the policy terms and conditions.
A life insurance policy won’t cover illness or injury, unless you have terminal illness cover or critical illness cover added to your policy. These are additional forms of cover which will allow you to make an early claim on your life insurance policy if you’re diagnosed with either a life-threatening or life changing illness.
In contrast, income protection won’t pay out for death. An income protection policy also won’t cover unemployment or any illnesses that are self-inflicted or that are as a result of drug or alcohol misuse.
Both an income protection and life insurance policy will become invalid if premium payments aren’t maintained or if ‘non-disclosure’ is found. This refers to withholding or providing false information on a life insurance application.
If you have any pre-existing illnesses these may be added as exclusions on both a life insurance and income protection policy, meaning they won’t be covered.
How are the premiums determined for income protection vs life insurance?
There are many factors considered by insurers when the premiums for a policy are calculated.
When applying for both income protection and life insurance, you’ll need to provide key information, such as:
- Smoking status
- Health and wellbeing
- Body mass index(BMI)
- Medical history
Policy factors will also help to determine the price you pay. For income protection this includes:
- Policy term
- Length of payment period (long term or short term)
- Deferred period
- Definition of incapacity
- Premium type
Whereas for life insurance this includes:
- Policy term
- Sum assured
- Policy type (term or whole of life)
While the key information required will be the same for both income protection and life insurance, there are different policy factors which will influence the price that you pay.
A key difference between life insurance and income protection is that income protection premiums aren’t always guaranteed (fixed). Depending on the policy you choose, premiums could either be guaranteed (which stay fixed), age-banded (which increase with your age), or reviewable (which can change due to certain criteria).
Which policy option is best?
This will always come down to your personal circumstances and what you value covering most of all. Those who want to cover the cost of their funeral or support a family when they’re gone may find life insurance is a better option. However, if you’re self employed or not entitled to traditional sick pay benefits, then it would be worth considering income protection.
If you have the budget, you could purchase both products simultaneously to cover all eventualities. Essentially, it all comes down to which product suits your individual and family circumstances best and your available budget.
You may already have an idea on which product suits your needs more. However, if you’re still unsure whether a policy is right for you, or whether it’s in your price range, it’s worth talking to a fee-free broker such as Reassured Advice. Alternatively, you could use a reputable comparison website to compare multiple quotes.
After all, you and your family’s life shouldn’t be determined by the fate of a coin.