In the UK, there are three types of insurance that are commonly misunderstood by consumers: health insurance, income protection and critical illness cover. For insurance experts, these three products are very different. But for newbies to the insurance market, understanding the differences between them can be a minefield. Here, we distinguish between health insurance, income protection and critical illness cover to help people choose a protection policy that is right for them.
Critical Illness Cover
Critical illness cover is designed to pay a tax free lump sum on the diagnosis of a pre-defined serious illness. All critical illness policies should cover seven core conditions. These are cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. Critical illness policies will not pay out for mild conditions.
Critical illness will pay you a lump sum on diagnosis, and you can choose to use the money for whatever you need. Many people use it to pay off their mortgage if they cannot work through the illness, to pay for private therapeutic care or to make modifications to the home. The money is designed to provide you with a financial cushion to make the recovery process a little bit easier.
The premiums of critical illness cover vary depending on the size of the lump sum you want to receive, how many conditions you want to be covered for, and personal details like your health and your smoker status. Critical illness cover can be sold as a standalone product, or bought as an addition to your life insurance. By combining a critical illness benefit with a life insurance policy, you will be ensured a lump sum either on death OR on the diagnosis of a predefined critical illness.
Advantages
For single people with no dependents, critical illness cover that pays off the mortgage means you have fewer bills or a lump sum to play with if you are very unwell.
You will be under no pressure to get back to work because you will be financially supported
You can use your critical illness money for anything you like
Disadvantages
Benefits are payable only to survivors, but some insurance companies will pay as long as you survive a critical illness for a minimum of 15 days.
Once the money runs out, you will not be getting any more
Critical illness cover will only pay out for predefined illnesses, even if you cannot work for another milder condition
Income Protection Insurance
Income protection is a policy designed to replace part of your monthly income if you are unable to work through accident, sickness or unemployment. Rather than paying you a lump sum, income protection will give you a monthly income to live off.
Short term policies will only pay out for a maximum of 12 months, but long term policies can pay out until retirement. The money that you get paid is usually a percentage of your gross salary, up to around 60%. Income protection benefit can be used to meet general lifestyle costs, or it can be tied to a particular debt like your mortgage or credit card repayments.
The premiums of income protection will vary depending on your age, your smoking status and your medical history. Long term policies are usually more expensive than short term policies because they pay out for longer. A policy that pays out until retirement will cost more than a policy that pays out for five years.
Before buying an income protection policy, check with your employer about other benefits you may be eligible for. By law, an employer must pay most employees statutory sick pay for up to 28 weeks. If you choose an income protection policy that kicks in after these 28 days, your premiums will be lower.
Advantages
Income protection will mean you don’t have to rely on your savings or state benefits if you cannot work through illness or accident
Long term policies will pay out until retirement
Some policies offer cover for involuntary unemployment, giving you a maximum of 12 months to find another job
You can either use your money to pay for general lifestyle costs or to meet the costs of a specific debt- the policies are very flexible
Disadvantages
Short term income protection will only pay out for 12 months, even if you have not returned to work in this time
Premiums can be high if you work in a dangerous occupation or if you have a complicated medical history
Health Insurance
Health insurance will cover the costs of private treatment if you do not want to be treated on the NHS. With health insurance, you will skip the NHS waiting lists and be treated at a time of your choice, with a specialist of your choice, at a hospital of your choice.
Like most insurance policies, the amount you pay in premiums will affect your level of cover. Cheap health insurance policies may only cover the cost of inpatient treatment in a private hospital, and will often not cover cancer treatment. Mid-range policies will usually meet the costs of inpatient and out-patient treatment, and they may cover cancer treatment up to a certain annual limit. Comprehensive policies are the most expensive, but they will cover the cost of all private treatment, regardless of cost or treatment time.
Health insurance premiums will be affected by your age, your location and the type of policy you choose. You can lower the cost of health insurance premiums by adding an excess or not paying for hospitals you do not need to be covered for. When applying for health insurance, it is important to speak to an FSA regulated broker to ensure that you choose the right method of underwriting.
Advantages
Health insurance lets you choose your treatment time, your private hospital and your specialist without waiting on the NHS
You will stay in a private ensuite room with excellent facilities
Some policies cover the costs of expensive drugs not available on the NHS
Disadvantages
Some health insurance policies have limits which may mean you have to meet certain costs yourself if you exceed them
Health insurance will not cover pre-existing conditions
Health insurance does not cover treatment for chronic conditions
What type of policy do you need?
As you can see from the above, these three types of insurance are all very different, and there are advantages and disadvantages to all three. There are a number of instances where payments under one plan would not be allowed under the other.
All these policies will require you to disclose certain personal information, whether that be your medical history, your occupation or your smoker status. The best way to determine what policy is right for you is to use an insurance comparison website or an insurance broker to gain helpful advice and important information.
