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Home / News / Critical illness cover versus income protection: Weighing up the differences
Critical illness cover versus income protection: Weighing up the differences
15 November 2007 15:11:55
According to Linton Penman from US-based insurance company Unum, critical illness cover may often be the simpler and less expensive option, but individuals should bear in mind that there are some situations in which it does not pay out.
Underlining the importance of a backup in case of illness or incapacity striking, he granted it is "generally acknowledged that we spend most of what we earn".
"In fact, if growing debt is anything to go by, most of us will go further than this by spending money we don't have," said Mr Penman.
"But how would many of us be able to meet our regular monthly outgoings let alone rising borrowing costs, without the benefit of a regular monthly income?" he asked.
Noting that many workers will be concerned by the prospect of unemployment, the insurance specialist pointed out that it currently only affects around one in 20 people.
In contrast, the risk of being unable to work for six months or more because of illness or an accident stands around one in six, confirming the need for individuals to determine the best way to protect their livelihoods.
The Financial Services Authority's (FSA) Money Made Clear consumer website recently echoed Linton Penman's words by stating that many advisers recommend critical illness cover without underlining situations when it would not pay out.
"Income protection is the only product that comprehensively protects against the financial consequences of incapacity," emphasised the Unum representative, adding that "stress and mental health conditions in particular account for around 40 per cent of all claims for state incapacity benefit".
He agreed with observations made by the government's Income Protection Task Force in a 2006 white paper, including that the establishment of a "protection hierarchy" to prioritise the main forms of protection cover would clarify the advantages and disadvantages of each type of cover for customers.
Looking toward 2008, Mr Penman highlighted the increasingly important role income protection in particular looks set to play as the government launches its new Employment and Support Allowance.
"Actual benefit levels have not been published yet, but we do know that unlike now, the new allowance will not offer additional benefits dependent upon the claimant's age or where they have a financially dependent adult," he said.
"In addition, it is generally expected to be much more difficult to qualify for the new benefit."
Offering advice regarding a possible income protection policy, Mr Penman recommended taking appropriate time to think about how far cover is diluted through the addition of standard exclusions, as well as looking at how a premium has been calculated when requesting a quote.
He concluded that customers should also seek out a provider offering cover until age 70, as many people will need to work beyond 65.
Health insurance specialist Bupa recently added its voice to concerns that that there will be more need for income protection insurance as a result of the government's new welfare reform rules.
Direct Life and Pensions Services Ltd are one of the UK's leading providers of life insurance, term life assurance, mortgage protection, and critical illnesslife insurance policies online
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