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Income Protection vs Life Insurance: What's the difference?


Here at Wiltshire Friendly, we live and breathe income protection insurance. We have discussed income protection in previous articles, but what is the difference between income protection insurance and life insurance? In this article, we will define each term in detail and provide you with the key differences between the two.

What is income protection insurance? 

Income protection insurance is a long-term insurance plan designed to guarantee you a consistent stream of income in the event that you are unable to work due to illness or injury. This regular income can  continue until your retirement, a fixed period or until you are able to go back to work.

What is life insurance?

Life insurance is a financial safeguard that provides a safety net for your loved ones in the unfortunate event of your passing. Some life insurance policies also pay out if you are diagnosed with a terminal illness, such as cancer.

When you have a life insurance policy, your beneficiaries receive a lump sum payment, known as the death benefit, which can help cover funeral expenses, outstanding debts, and ongoing financial needs.

When does income protection insurance pay out?

Income Protection Insurance policies will require policy holders to provide evidence that proves their illness or disability means they are unable to work. This often involves providing statements or reports from medical professionals.

Income protection policies will typically provide their own definition of ‘disability’ to specify the conditions the policy will pay out. The definition of disability that is used by providers can vary, but one common approach is to assess disability based on the policyholder's ability to perform the duties of their job. In these cases, the insurance company will evaluate whether the policyholder's health condition or injury stops them from carrying out their job.

Alternatively, some policies adopt a broader perspective on disability that means that even if a policyholder could potentially work in a different job or industry, they may still be considered disabled if their health condition prevents them from performing any work that aligns with their qualifications and previous work experience.

Income protection policies typically include a waiting period, in which the policyholder must wait before their benefit payments start. Depending on the policy, you can choose your waiting period. The longer you choose this period to be, the lower your monthly premiums are. The most common waiting periods are 4, 13, and 26 weeks, and a year.

Policyholders should be aware of exclusions, such as pre-existing conditions or injuries resulting from certain activities, which are specified in the policy. Additionally, income protection policies require regular premium payments to keep the coverage active. Failure to pay premiums may lead to the lapse of the policy and the loss of coverage.

How long your insurance policy pays out depends on the type of cover that you have. There are two different types: short-term and long-term.

Short-term cover

Short-term cover will pay out for the fixed amount of time agreed in your policy, or until you return to work - whichever is sooner. This type of coverage is characterised by predetermined time frames, often 1, 2, or 5 years. During this period, you will receive regular benefit payments, offering a financial safety net to help cover living expenses and maintain a certain quality of life while recovering from illness or injury.

Long-term cover

On the other hand, long-term cover takes a more comprehensive approach by continuing to provide benefit payments until you are deemed well enough to return to work, or until your policy reaches its predetermined end date. The extended coverage provided by long-term policies is particularly beneficial for those with severe or chronic conditions that require an extended recovery period.

When does life insurance pay out?

The payout of a life insurance policy is easier to understand. For a life insurance payout to occur, the policyholder has to die during the policy term (or be diagnosed with a terminal illness if you have that level of coverage).  You choose how long your policy lasts for - commonly these periods are 10, 15, 20, 25, or 30 years. You can also choose a lifetime policy with certain insurers, meaning that you will definitely be insured when you die. For both fixed term and lifetime policies, you have to remain up to date with your monthly or yearly premiums, and the policy can’t have been cancelled. 

Usually, the cause of death isn’t considered in whether the policy pays out or not, with most policies covering death due to illness, accidents, or natural causes. However, there may be exceptions, such as suicide within a specified period after the policy is issued.

The beneficiaries of the policy must start the claims process by contacting the life insurance company. This usually involves submitting a death certificate and completing the necessary forms. Like with income protection insurance, some policies may have a waiting period before the full death benefit is paid out, especially if the policy is relatively new. This waiting period, usually between one to two years, is designed to prevent fraud.

How much does income protection insurance cost?

Income protection insurance can vary in cost depending on the level of cover you have chosen and your individual circumstances. Factors that can impact the monthly cost are:

  • Your age

  • Your occupation

  • The percentage of income you want to cover

  • Your overall health - current health, weight and family medical history

  • Whether or not you smoke or have smoked

  • The waiting period

  • The range of illnesses and injuries covered

The cost will also depend on whether you choose a standard premium, which the insurer can increase over time, or a guaranteed premium, which remains fixed for as long as you have the policy.

Guaranteed premiums can cost more in the short-term, but most people like the security of knowing their regular charges.

How much does life insurance cost?

Like income protection, the cost of life insurance can vary widely based on individual circumstances, coverage needs, and the type of policy chosen. Factors that can affect the cost of life insurance are:

  • Your age

  • Your health

  • Your coverage amount

  • The type of policy

  • The term length

  • Your gender

  • Your occupation

  • Your lifestyle

  • Your location

  • How often you pay your premiums (monthly or annually)

To determine the specific cost for your situation, it's recommended to request quotes from multiple insurance providers and consider consulting with a licensed insurance professional or financial advisor. They can help assess your needs, compare policies, and find the most suitable coverage within your budget. 

Do you need to have both policies?

In short, no. It is not a requirement to have income protection insurance or life insurance. However, they are definitely a good safety blanket for your family should the worst happen. 

For example, in the Financial Conduct Authority’s Financial Lives Survey from 2022, only 6% of people reported to have an income protection insurance policy, despite them discovering that 7.8 million people are finding it difficult to keep up with bills.

According to Direct Line Life Insurance, 60% of people believe that life insurance would benefit their family if the worst were to happen, however only 35% have a life insurance policy.

How Wiltshire Friendly can help

Wiltshire Friendly specialises in offering income protection solutions. Our focus is on providing income replacement coverage to individuals, employers, and sports players at various levels, including amateurs, semi-professionals, and professionals, who find themselves without income due to illness or injury that hinders their ability to work.

Should you need to make a claim, apply for increased coverage, or discuss your specific requirements, get in touch with us today