Income protection vs critical illness: everything you need to know

Income protection insurance offers financial security and peace of mind to your employees if they get sick or injured, but there are some fundamental differences between income protection and critical illness cover that are important for any business to understand.

Let’s break down the key differences between income protection vs critical illness insurance.

How do income protection

and critical illness cover work?

The main difference between income protection and critical illness is that income protection will pay an employee a portion of their salary every month, for anywhere from two to five years, or until they reach retirement or a specific age, whereas critical illness cover will pay out a lump sum when an employee is sick or injured.

What is critical illness cover? 

Group critical illness cover pays out a lump sum to an individual if they develop an illness or suffer an injury that is defined in their plan. 

Who is covered under critical illness policies? 

Anyone with an injury or illness defined in their plan that prevents them from earning a living for at least 14 days. The cover depends on what illnesses or injuries an employer chooses to include.

What is covered under critical illness?

The three most common illnesses covered under critical illness are heart attacks, cancer diagnoses and strokes. Not all illnesses are covered, though, and critical illness doesn’t cover minor injuries. Ultimately, it’s up to your insurer whether your diagnosis matches its definition.

What is the payout for critical illness? 

Critical illness cover usually pays out a fixed amount, or 5x the annual salary of an employee. 

Once the payment is received, the employee can choose how to spend the money – whether that’s for medical bills, rent or groceries.

What is income protection cover? 

Group income protection pays out a portion of an employee’s salary on a monthly basis when they can’t work due to injury or illness. 

Sometimes called ‘sick pay’ or ‘permanent health insurance’, income protection also offers support and resources to employees to help them rehabilitate and hasten their return to work. This type of cover can last through to retirement if necessary. 

Who is covered by income protection insurance? 

Anybody who is unable to work due to any injury or illness. However, previous underlying conditions may not be covered. 

What is the payout for income protection? 

When an employee makes a claim, they receive a designated percentage of their salary on an ongoing monthly basis – and that could continue until retirement. The amount is usually between 50% and 80% of their normal monthly earnings. 

The payout takes annual inflation into account, but negotiated salary increases are not included.

Choosing income protection vs critical illness

There are some key points to consider when assessing whether to offer one or both of these policies:

• Policy costs: Costs for both policies are usually dependent on the provider. The price for income protection largely depends on the risk level of your workplace. The cost of critical illness depends on which illnesses/injuries you choose to include in your plan.
• Deferral periods: For income protection, the employer often chooses the deferral period on application. It can take between 10 and 30 days for a critical illness payment to be deposited into an employee’s account – however an employee is eligible as soon as they are diagnosed with an illness or injury that is covered by the plan.
• Injuries and illnesses covered: While employees must be diagnosed with a specified illness to receive critical illness cover, income protection covers employees experiencing a physical or mental setback that prohibits them from completing their daily duties. Income protection offers a broader definition of illness and injury. If you have a bad back or suffer from depression, for example, you may find those conditions aren’t covered by critical illness insurance.
• Age limits: Income protection usually offers cover up to retirement age, but can offer cover up to the age of 80 with some providers. Critical illness usually covers employees up to the age of 70. 

Why offer income protection and critical illness benefits? 

Employee benefits are not only a great way to incentivise employees and encourage them to stick around, they are also key when it comes to recruiting the best people. A 2023 report on future workplace trends from Glassdoor and Indeed found that while salaries are still front of mind for employees, offering the best employee benefits helps you stand out from the competition and attract top talent.

Group income protection enables employers to improve their sick pay offering to employees. Statutory Sick Pay (the Government-mandated minimum sick pay for employees who are too ill to work) requires employers to pay just £116.75 per week for up to 28 weeks. That’s not enough for most people to live on.

Offering group income protection gives your people continuity in earnings, enabling them to focus on getting better, rather than worrying about their finances. It also gives your employees peace of mind and ensures they feel valued and protected.

As it tends to be more expensive, critical illness cover is sometimes considered to be a ‘prestige’ benefit. If it’s paid in full by the employer, it is often only offered to select groups of employees as standard.

Income protection also enables someone to make multiple claims, whereas critical illness cover ends when a payout is made. 

Which employee benefit you choose to offer depends on your business and your goals. If you’re struggling to find what’s right for you, contact our experts at YuLife to find the right policy plan for your team.

If you found this guide useful, don't miss our breakdown of life insurance vs income protection.