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The difference between life insurance and critical illness cover

Published  20 June 2022
   3 min read

Life insurance isn't the same as critical illness insurance, but there are some similarities.

Both protect you financially against the unexpected, and both pay out a tax-free lump sum if there’s a claim. However, the conditions for pay-outs are different. Let’s take a closer look. 

Do I need critical illness insurance?

You can have both, but to help you decide, it’s important to know how life insurance works. For example, if you were to die during the duration of your life insurance policy, your chosen beneficiaries will receive a lump sum of money.

This lump sum can help to support and protect your beneficiaries after you’re gone, as your own income will no longer be coming into the household. It can also help them financially if they take on your outstanding debt and support them with expenses such as funeral costs.

Critical illness insurance works differently, as it pays out before a person dies. Claims are made once the policy holder is diagnosed with an illness from the policy’s list of covered critical conditions.  

While they’re different, both types of insurance are worth considering if you have dependants who rely on you financially. 

 

How does critical illness insurance work?

To recap, critical illness insurance pays out once you’re diagnosed with an illness that’s listed in the conditions of your policy. If the illness meets certain definitions listed within the policy, your provider will pay a one-time tax-free lump sum.  

Typically, critical illness policies end once the pay-out is made. If you pass away after the policy ends, no more money is paid out. That is what life insurance is for, so if you want to ensure your beneficiaries get another lump sum after your death, it’s a good idea to take out a life insurance policy too.  

 

Can I get critical illness cover and life insurance together?

Yes, you can get life insurance and critical illness insurance together. They don’t cancel each other out. In fact, many insurance providers bundle the two products together, by offering critical illness cover as an add-on to their life insurance product.  

It's important to remember that your critical illness cover will only pay out if you’re diagnosed with an illness listed within the policy, and only if it meets certain definitions. Always read the small print.

If you’re ever unsure about what kind of cover you need, our guide to types of life insurance can help you understand what you could be eligible for and how different policies work. 

 

Do you pay tax on critical illness insurance pay-outs?

No. Critical illness cover pay-outs aren’t considered as income by the UK government, because you haven’t technically earned it. This means that any pay-outs from critical illness insurance or life insurance won’t be subject to income tax. pay-out won’t be subject to income tax. 

You pay the premium from your take-home pay, which has already been taxed.  

 

What is the difference between critical illness cover and income protection?

The main difference between critical illness cover and income protection is the way in which each policy pays out: 

  • Critical illness cover is designed to help you cope financially if you’re diagnosed with an illness specified in your policy, by providing a one-off lump sum  
  • Income protection is more long term. It pays a percentage of your income each month if you’re unable to work. The percentage of income, and how long it pays out for, are agreed at the outset. 

You don’t need to have a critical illness to get a pay-out from income protection. However, critical illness cover won’t pay out unless you have a specific illness that meets certain conditions.