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