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Life Insurance vs Income Protection

Last updated: 13/06/2023 | Estimated Reading Time: 11 minutes

No one wants to think of death or illness, but to ensure that you and your family are always protected, it’s important to plan for worst-case scenarios.

Life insurance and income protection insurance are both designed to offer you and your loved ones a safety net if the worst were to happen. However, these policies don’t offer the exact same cover, so you’ll need to decide which one is right for you.

In this helpful guide, we’ll discuss the difference between life insurance and income protection insurance and their respective benefits and limitations. Overall, this will help you determine which type of insurance policy would be more suitable for your personal circumstances.

In This Guide:

What Is Life Insurance?

Having a life insurance policy means that your family is financially protected in the event of your death. This money can be used to pay off any debt (such as a mortgage), pay the bills and give your family enough to live on for years. 

With a life insurance policy, you’ll pay monthly premiums so that your family will receive a lump sum of cash when you die. The amount that you pay is dependent on your age, overall health and lifestyle.

“Term” Life Insurance vs. “Whole of Life” Insurance

These monthly payments are also affected by the type of policy you have. There are many types of life insurance coverage to choose from, with the main types being “term” life insurance and “whole of life” insurance. 

“Term life insurance” means that you have life insurance cover for a specific period, so if you die within the agreed-upon amount of time (e.g., 40 years), your family will receive the lump sum payment. On the other hand, “whole of life insurance” provides coverage no matter when you die, although it’s generally more expensive than term life insurance.

Within these main categories, there are various other types of life insurance cover. For example, increasing term life insurance ensures that the lump sum of cash increases in value each year by a fixed amount or in line with inflation, but your monthly premiums will increase too. You can also opt for renewable term insurance, convertible term insurance and joint life insurance, or you can customise your life insurance policy with add-ons like critical illness cover.

What Is Income Protection Insurance?

Unlike life insurance, income protection insurance covers you in the event that you can no longer work due to injury or illness. Therefore, income protection insurance, also known as permanent health insurance, can benefit you in addition to your loved ones, helping you pay off your expenses while you’re out of work.

Another difference between the two is that income protection insurance grants you a percentage of your regular income in monthly tax-free payments rather than a lump sum of money. Typically, this policy will give you between 50% and 70% of your regular income. You can claim this money until you retire or your policy ends.

However, you can’t claim this money as soon as you stop working. If you have an income protection insurance policy, you’ll be asked to set a deferral period, which is the amount of time you’ll have to wait to start receiving payments if you can no longer work. You’ll usually have to wait a minimum of four weeks, but you can set this waiting period to up to 12 months if you want to reduce your fixed monthly premiums. This is a great option if you already have savings you can initially rely on.

Decreasing-term life insurance

There are other types of insurance policies that provide similar coverage to income protection insurance. Decreasing term life insurance suits those who wish to be covered for the remaining mortgage repayment on their home, so that loved ones can repay the balance of the mortgage if they pass away. The cover provided by a decreasing-term policy reduces over time, broadly in line with the balance on a repayment mortgage

As well as being a great option for those looking to have a stable mortgage repayment insurance option that will always cover the amount in line with how much is being paid on the mortgage, decreasing-term life insurance may also be a great option if you’re starting a family.

Decreasing-term life insurance is often cheaper than standard insurance as the nature of the policy makes it less expensive for insurers. With decreasing-term life insurance, your payments stay the same throughout the length of your policy unless you change your policy.

Life Insurance vs. Income Protection Insurance

Ultimately, the main differences between life insurance and income protection insurance are that the latter can benefit both you and your family and will pay you in regular tax-free instalments rather than a lump sum. On the other hand, life insurance is more about protecting your immediate family members as the policy will only be activated upon your death (or terminal illness diagnosis in some cases).

Most people are familiar with life insurance and are comforted by the knowledge that their family will be looked after when they’re gone, but it’s surprising that many people are still unaware of the benefits of income protection insurance. We’re totally dependent on our incomes to continue paying off expenses and living our day-to-day lives, so why aren’t more people concerned about securing this vital income if severe illness or injury occurs?

However, it isn’t always this simple. There are many benefits and limitations to consider if you’re thinking of getting life insurance or income protection cover. This will help you decide which type of policy is right for you.

Pros and Cons of Life Insurance

Life insurance is particularly popular among those with dependents and large debts, such as mortgages. Here are the main benefits of this type of insurance policy:

  • Many types of coverage to choose from. Depending on your personal needs, you can opt for term life insurance, whole of life insurance, increasing term insurance, joint life insurance (a great option for couples with close financial ties) or an over-50s plan. This means you can tailor your life insurance policy to suit your individual circumstances.
  • Can add critical illness cover. In general, life insurance will only cover your death, but many policies allow you to add critical illness insurance for an extra cost. With critical illness insurance, you’ll receive a lump sum of money if you experience a severe illness, helping you pay your expenses if you can no longer work.
  • Looking after your dependents. A life insurance policy will help you look after your family financially once you’re gone, which is essential if you have dependents or are the sole breadwinner.

Of course, there are also various limitations to this type of insurance policy. Here are the main ones you should be aware of:

  • Expensive if you have pre-existing medical conditions. When you get a life insurance policy, you’ll be asked questions about your medical history and lifestyle to determine your monthly premiums. If you’re older, in poor health or live a dangerous lifestyle (e.g., drug and alcohol abuse), your life insurance will be more expensive or you may struggle to secure a policy.
  • Premiums can increase over time. If your monthly premiums increase over time, your life insurance policy could end up being more expensive than you anticipated. This is particularly pertinent for those who choose an increasing term policy.
  • Doesn’t cover illnesses and injuries. If you become ill or injured and therefore cannot work, your life insurance won’t provide coverage in this scenario. Critical illness cover can provide financial support in certain circumstances.

Pros and Cons of Income Protection Insurance

Income protection insurance is fantastic for those who need extra support in the event that they can no longer work. Here are the main benefits:

  • Long-term payments. Instead of receiving a lump sum payment, you’ll receive a percentage of your regular income as tax-free monthly payments. This could be a much better option if you’re off work for a long period of time.
  • Covers debt repayments. If you can no longer work, this can put your finances in jeopardy as you struggle to keep up with debt repayments. With an income protection insurance policy, you won’t have to worry as these payments will be covered.
  • Higher income than statutory sick pay. Many workers only receive statutory sick pay if they’re off work, which may not be enough to cover their expenses. If you have an income protection policy, you can get more money to cover these costs.
  • Great for self-employed people. Those who are self-employed don’t have access to the same workplace benefits as employees, such as statutory sick pay. Therefore, if you’re self-employed, income protection insurance may be necessary for you to cover living costs if you can’t work.
  • There are cheaper options. To keep your insurance costs down, you can opt for income protection insurance policies that only offer payment if you can’t do any jobs due to injury or illness, not just your own job.

Again, there are limitations to any kind of insurance policy, so will income protection insurance work for you? Here are the main drawbacks you should bear in mind:

  • Can’t claim straight away. Due to the referral period, you won’t be able to make an income protection claim for at least 4 weeks after you stop working. Therefore, you need to cover this period with your own savings.
  • May be expensive. Like life insurance, income protection insurance can be more expensive if you have pre-existing medical conditions. Additionally, this insurance can be more costly if you have a dangerous job that increases your risk of workplace illnesses or injuries.
  • May be unnecessary. Income protection insurance could be unnecessary for you if you have a life insurance policy with critical illness cover. Income protection offers financial support in a wider range of circumstances but it can be more expensive. Additionally, if you have a generous sick pay policy at your workplace, you may not need extra coverage.

Which Insurance Policy Is Right for Me?

Choosing between life insurance and income protection insurance can be rather complicated. There are quite a few similarities between these insurance policies, but your personal circumstances will ultimately determine which one is right for you.

If you’re trying to compare income protection insurance and life insurance, remember to factor in your current employment status, familial obligations, loan repayments and living costs. Life insurance is strongly recommended for those with dependents who’ll need financial support if you’re gone. This means that if you’re the sole breadwinner in your family and you have a large mortgage, life insurance could support your family and give you peace of mind. 

For those who are self-employed or only entitled to statutory sick pay, income protection insurance could be vital for ensuring you can keep up with living costs and loan repayments if you can no longer work. However, if you already have critical illness cover or generous workplace benefits, the monthly premiums may be too costly compared to what you’d possibly gain.

Could I Get Both Types of Insurance?

You can have multiple insurance policies if you wish, so if you feel like you could benefit from both income protection and life insurance, then you can absolutely get both of them. However, you should make sure that these policies aren’t overlapping too much. If you have good critical illness cover included in your life insurance policy, getting income protection insurance on top of this could be too expensive for what it’s worth.

Alternatively, some insurance providers offer a ‘menu plan’ with their insurance policies, allowing you to mix-and-match various levels of life insurance, critical illness and income protection cover. This could be a great option if you have more complex requirements.

Getting Life Insurance or Income Protection Cover

Have you decided to buy income protection insurance or life insurance? Looking at price comparison websites and shopping around can help you get the best deals. You can also talk to an independent financial advisor to go through your requirements and find the right policies for your needs.

Here at Money Expert, we’d love to help you find the best insurance policy for you and your family without breaking the bank. If you need advice on which insurance policies you should choose, don’t hesitate to get in touch and take advantage of our amazing money-saving tips.

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