Insurance in the UK: 3 Types of Financial Protection You Should Know About

When it comes to insurance, one of the most common questions is: “What type of insurance do I need?”

However, there is no single insurance policy that automatically protects you and your family in every possible situation.

Death, a serious illness diagnosis and being unable to work due to your health are very different circumstances, with different financial consequences. That is why it is important to understand the difference between three key types of protection: Life Insurance, Critical/Serious Illness Cover and Income Protection.

Here is a simple overview of what each type of protection is designed to do.

Why Should You Think About Financial Protection in Advance?

We insure our cars, homes and other valuable possessions, but we often spend less time thinking about what would happen to our family finances if our health circumstances changed.

For example:

What would happen to the mortgage and other household expenses if one of the main sources of income disappeared?

How would monthly expenses be covered if someone could not work for several months because of their health?

What would be the financial impact of being diagnosed with a serious illness?

The basic principle is simple: protection is arranged before the event you want to protect yourself against happens.

If a health condition already exists, it may affect whether cover is available, the terms offered and the cost of the policy.

1. Life Insurance – Financial Protection for Your Family

Life Insurance is primarily designed to provide financial protection for the people who may depend on you.

It may be particularly relevant for people who:

• have children;
• have a spouse or partner;
• have a mortgage;
• have other financial commitments;
• have family members who rely significantly on their income.

The main question to consider is:

“What would happen to my family financially if I were no longer here?”

If an insured event occurs, Life Insurance may provide a payout in accordance with the terms and conditions of the policy.

For example, where a family has a mortgage, Life Insurance may form part of a wider financial protection plan in the event that one of the homeowners dies.

However, Life Insurance should not automatically be viewed as protection against every possible health-related situation. If someone is alive but is diagnosed with a serious illness or becomes unable to work, other types of protection are designed to address those risks.

2. Critical/Serious Illness Cover – Protection Following Certain Diagnoses

This type of protection addresses a different situation.

The person is alive but is diagnosed with a serious medical condition that meets the definitions and requirements of their policy.

Critical or Serious Illness Cover may provide a payout following an eligible diagnosis, provided it meets the criteria set out in the particular policy.

Depending on the product, covered conditions may include, for example, certain types of cancer, heart attack, stroke or multiple sclerosis.

However, there is an important point to understand:

A condition being considered serious does not automatically mean that an insurance policy will pay out.

Products vary in terms of the conditions they cover, their definitions, severity requirements and other criteria.

Therefore, when considering this type of protection, it is important to look beyond the amount of cover and understand exactly what the policy covers and under what circumstances.

3. Income Protection – Protecting Your Income if You Cannot Work

Income Protection answers another important question:

“What happens to my income if my health prevents me from working?”

This type of insurance is designed to protect part of your income if you are unable to work due to your health and your circumstances meet the terms of the policy.

This is where the difference between Income Protection and Critical/Serious Illness Cover becomes particularly important.

With Critical/Serious Illness Cover, the key event is a particular diagnosis that meets the policy criteria.

With Income Protection, the key factor is being unable to work because of your health, in accordance with the terms of the policy.

What Is a Deferred Period?

Income Protection will usually include a Deferred Period — the waiting period before insurance payments begin.

For example, a Deferred Period could be 4, 8, 12 or 26 weeks, depending on the product selected and the terms of the policy.

If your Deferred Period is eight weeks, this means payments do not begin from the first day you are unable to work. The agreed waiting period must first pass, after which payments can begin if the claim is accepted and the policy conditions are met.

When considering the Deferred Period, it is important to take into account whether you have sick pay from your employer, personal savings or other financial resources that could support you during this time.

The length of the Deferred Period can also affect the cost of the policy. It is therefore important to consider how long you could realistically support yourself before you would need payments from the insurance policy.

Why Might One Insurance Policy Not Be Enough?

A common misconception is that there should be “one insurance policy that covers everything.”

In reality, these three types of protection are designed to address different financial needs.

The difference can be remembered through three simple questions:

Life Insurance: What would happen to my family financially if I died?

Critical/Serious Illness Cover: What would happen if I received a diagnosis that met the conditions of my policy?

Income Protection: What would happen to my income if my health prevented me from working?

Having Life Insurance therefore does not automatically mean that you are also protected against a serious illness diagnosis or loss of income due to being unable to work.

Depending on individual circumstances, someone may need one type of protection or a combination of several products. These products do not necessarily have to be provided by the same insurance company.

What Does the Choice of Insurance Depend On?

There is no single solution that is suitable for everyone.

When considering the available options, a number of factors may be relevant, including:

• age;
• health;
• occupation;
• income;
• family circumstances;
• financial commitments;
• whether you have a mortgage;
• the level of protection required;
• how long you need the cover for.

Therefore, the question should not simply be:

“How much will my insurance cost each month?”

It is equally important to understand what you are getting for that amount, when the protection applies and what conditions are included in the policy.

Two insurance products with a similar monthly cost can offer very different terms and levels of protection.

Why Is It Important to Arrange Protection in Advance?

Insurance does not work on the basis of waiting until a problem occurs, taking out a policy and then receiving a payout.

When you apply for insurance, the insurer assesses your individual circumstances. Existing medical conditions and other factors may affect the options available and the terms offered.

This is why it is better to consider financial protection before you reach the point where you urgently need it.

It is also important to provide complete and accurate information during the application process. Any future claim will be assessed in accordance with the terms of the policy and the information provided when the cover was arranged.

What Should You Remember?

Life Insurance, Critical/Serious Illness Cover and Income Protection are not three different names for the same insurance.

Each is designed to protect against different financial consequences.

There is no universal combination that is right for everyone. Your family circumstances, income, occupation, financial commitments, health and future plans should all be taken into consideration.

Advice relating to these protection products is a regulated financial activity. The role of a qualified adviser is to assess your individual circumstances, explain the differences between the types of protection and the terms of available products, helping you make an informed decision.

Terms, limitations and eligibility criteria vary depending on the product, insurer and individual circumstances.

This post is for information purposes only and does not constitute financial or insurance advice.