In the UK, there are three types of insurance that are often misunderstood by consumers: health insurance, income protection and critical illness cover. For insurance experts, these three products are very different. But for those new to the insurance market, understanding the differences between them can be a minefield. Here, we distinguish between health insurance, income protection, and critical illness coverage to help people choose a protection policy that’s right for them.

Critical illness coverage

Critical illness coverage is designed to pay a tax-free lump sum upon the diagnosis of a pre-defined critical illness. All critical illness policies must cover seven basic conditions. These are cancer, coronary artery bypass grafting, heart attack, kidney failure, major organ transplantation, multiple sclerosis, and stroke. Critical illness policies will not pay for mild conditions.

Critical illness will pay you a lump sum at the time of diagnosis, and you can choose to use the money for whatever you need. Many people use it to pay their mortgage if they are unable to work during illness, to pay for private therapeutic care, or to make home modifications. The money is designed to provide you with a financial cushion to make the recovery process a bit easier.

Critical illness coverage premiums vary depending on the size of the lump sum you wish to receive, the number of conditions you wish to cover, and personal details such as your health and smoking status. Critical illness coverage can be sold as a stand-alone product or purchased as an addition to your life insurance. By combining a critical illness benefit with a life insurance policy, you will be insured a lump sum in the event of death OR on diagnosis of a pre-defined critical illness.

Advantages

For single people with no dependents, mortgage-paying critical illness coverage means you have fewer bills or a lump sum to play with if you’re unwell.

You will not have any pressure to return to work because you will have financial support.

You can use your critical illness money for whatever you want

Disadvantages

Benefits are paid only to survivors, but some insurance companies will pay as long as you survive a critical illness for at least 15 days.

Once the money runs out, you won’t get any more

Critical coverage will only pay for pre-defined illnesses, even if you are unable to work due to another, more minor condition.

income protection insurance

Income protection is a policy designed to replace part of your monthly income if you are unable to work due to accident, illness or unemployment. Instead of paying you a lump sum, income protection will give you a monthly income to live on.

Short-term policies will only pay for a maximum of 12 months, but long-term policies can pay until retirement. The money you get paid is usually a percentage of your gross salary, up to around 60%. The income protection benefit can be used to cover general lifestyle costs, or it can be tied to a particular debt, like your mortgage or credit card payments.

Income protection premiums will vary based on your age, smoking status, and medical history. Long-term policies are often more expensive than short-term policies because they pay out over a longer period of time. A policy that pays until retirement will cost more than a policy that pays over five years.

Before you buy an income protection policy, check with your employer about other benefits you may be eligible for. By law, an employer must pay most employees legal 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 can’t work due to illness or accident

Long-term policies will pay until retirement

Some policies offer coverage for involuntary unemployment, giving you up to 12 months to find another job.

You can use your money to pay general lifestyle costs or to cover the costs of a specific debt; the policies are very flexible.

Disadvantages

Short-term income protection will only pay for 12 months, even if you haven’t returned to work in that time

Premiums can be high if you work in a dangerous occupation or have a complicated medical history

health insurance

Health insurance will cover the costs of private treatment if you do not wish to receive treatment on the NHS. With health insurance, you’ll skip NHS waiting lists and be treated at a time of your choice, with a specialist of your choice, at the hospital of your choice.

Like most insurance policies, the amount you pay in premiums will affect your level of coverage. Cheap health insurance policies may only cover the cost of inpatient treatment at a private hospital and will often not cover cancer treatment. Midrange policies will generally cover the costs of inpatient and outpatient treatment, and may cover cancer treatment up to a certain annual limit. Comprehensive policies are the most expensive, but will cover the cost of all private treatment, regardless of cost or length of treatment.

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 don’t need to be covered for. When applying for health insurance, it’s important to speak with an FSA-regulated broker to ensure you choose the correct method of underwriting.

Advantages

Health insurance allows you to choose your treatment time, your private hospital and your specialist without waiting on the NHS

You will stay in a private room with bathroom and excellent facilities.

Some policies cover the costs of expensive drugs that are not available on the NHS

Disadvantages

Some health insurance policies have limits, which may mean you have to cover certain costs yourself if you exceed them.

Health insurance will not cover pre-existing conditions

Health insurance does not cover treatment for chronic diseases

What kind 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 several cases where payments from one plan would not be allowed under the other.

All of these policies will require you to disclose certain personal information, whether it is your medical history, your occupation, or your smoking status. The best way to determine which policy is right for you is to use an insurance comparison website or insurance broker for helpful advice and important information.