Weighing up your options when it comes to mortgage protection can be mind-boggling. In her latest column Hatice Karadal, manager of the protection team at mortgage intermediary Alexander Hall, explains the differences – and similarities – between products to help you make a better choice.
Critical illness provides a lump sum benefit in the event of a life-changing illness. Income protection pays a regular monthly income if you are unable to work due to an accident or sickness. These two benefits can complement each other, as they cover you for different things.
In some cases, both might pay out at the same time – for example, if an individual was diagnosed with cancer and therefore signed off work. However, in some cases, one might pay out where the other doesn’t.
An example of this might be where an individual is signed off work due to a stress-related illness but has not been diagnosed with a critical illness.
What are the main differences?
Although the two types of covers share some similarities, it is important to understand the differences when considering your options.
How claims are paid
Payments for critical illness cover come in the form of a one-time lump sum payment. This provides a cash reserve and can be used in any way the claimant sees fit. Income protection is different in that it pays a continuous monthly income. This provides an income stream until the claimant returns to work.
Types of illness
A critical illness policy has a list of specific conditions and definitions that the holder would be covered for. Any illness not listed in the plan will not be considered when a claim is made. An income protection policy pays when any illness or injury prevents the holder from working. There are no specific conditions, as long as the holder is signed off work due to illness or injury.
The amount of payment
Critical illness cover is paid for the full amount assured, and is not subject to how much the holder earns. Income protection cover pays a person’s gross monthly income of up to around 60%, so there are limits to how much cover you can gain.
Number of claims
Critical illness cover can only be claimed once on the main benefit and the policy will cease. With an income protection cover, it’s possible to make unlimited claims throughout the life time of the policy.
Claims statistics
When choosing the right type of cover it is also important to understand the claims statistics. Thankfully, both policies have very good pay-out ratios, with insurers typically reporting paid claim rates at around 93% for critical illness cover, and around 95% for income protection, according to Legal & General claim statistics in 2018.
Cost
Price is one of the main factors people consider first when comparing the two policies. Income protection is considered to be more cost effective than critical illness cover, but this all depends on an individual’s circumstances.
If we look at a 35-year-old non-smoker taking critical illness cover of £250,000 over 30 years – this would cost £38 per month. For the same person taking out income protection cover for a low-risk occupation, an income of £1,500 per month over 35 years would cost around £23 per month, potentially paying a total of £630,000.
What should you do?
If you are thinking about arranging either of these types of cover, it is important to speak to a specialist adviser. More information about the topics covered above can be found on the www.alexanderhall.co.uk website. Alternatively, my contact details are below.
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My team and I are on hand to answer your questions and queries. Feel free to contact me on: Hatice.Karadal@alexanderhall.co.uk to discuss any of the points raised or visit www.alexanderhall.co.uk
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