As with many areas of personal financial planning, the answer is that it depends… It depends on your financial goals, your occupation, your personal circumstances and in fact a whole range of factors that a Financial Broker will consider before recommending the right product for you.
To give you a taste of the factors to be considered, below are some of the main differences between these two products.
Specified illness Cover is illness based
Specified illness cover, sometimes called serious illness cover or indeed critical illness cover, is an insurance policy that pays out a lump sum benefit in the event of the policyholder being diagnosed with one of the specified illnesses, as set out in the policy conditions. It only pays out if the illness is one of those specified, but is not based on your ability to work or other such factors.
Income Protection is based on ability to work
Income protection, sometimes called Permanent Health Insurance (PHI) provides you with a replacement income, should you be unable to work due to illness or accident – there is no specified list of illnesses. This policy replaces your income, rather than paying out a lump sum benefit. This replacement income continues to be paid until you return to work, or until your retirement date.
Lump sum v income
This is the first key difference. A specified illness policy will pay out a lump sum when you claim on your policy. This will be very beneficial if you have to make significant life changes – for example you might need to extend / modify your house to more easily enable you to manage your illness. Income protection on the other hand replaces your lost income, as a result of you being unable to work. This replacement income will continue right up to your retirement age if you are unable to return to work, providing you with an extremely valuable long-term benefit.
Income Protection is occupation dependant
Both the cost and access to income protection is dependant on your occupation. For example, there is no provider that is willing to provide income protection cover to stuntmen as obviously they pose a higher risk of having an accident! Some occupations (for example ones that involve a lot of driving) can access income protection, but at a higher cost than more sedentary occupations. Your Financial Broker will help you find the right provider and policy for your specific situation.
Access to both policies takes account of your current state of health, family history etc.
Tax relief is available on Income Protection
Full tax relief at your highest income tax rate is still available on income protection policies. This significantly reduces the cost. This tax relief is not available on Specified Illness cover.
There are lots of factors to consider, these are just a few of the main ones. Where do you start? Talk to your Financial Broker to find the right policy for you.