Guide to life insurance and income protection
Get to know how it works
If you couldn't work because of sickness or disability how would you manage? How would your dependents cope if you died? If you can't rely on savings or a good employee benefits package then getting the right protection is crucial.
Protection for you and your family
Dealing with death and illness is hard enough without piling money worries on top. Putting in place income protection and life insurance will help you and your family to keep paying the bills.
You may have insurance in place to pay off your mortgage should you die, but don't forget there will still be household bills to pay and money needed to pay for everyday expenses like food and clothing.
Life insurance will pay out either a lump sum or regular payments to your dependents when you die.
The cheapest option is term life insurance – which runs for a fixed period such as 10 or 25 years. This will pay out if you die during the term of the policy.
It's more expensive but a whole of life policy pays out whenever you die as long as you have kept up the insurance payments.
Life insurance covers the worst case scenario but there are also options to choose to cover you for illness:
- income protection insurance
- critical illness cover
- or both
Income protection insurance
An income protection policy replaces part of your income if you're unable to work for a long period of time, through illness, injury or disability. Once started, it will continue to pay you an income until you're able to work again, or you reach retirement, whichever happens soonest.
There is a waiting period before payments start, which is agreed when you take out the policy. So when choosing, be sure you would be financially comfortable while you wait for the policy payments to kick in. But being able to wait longer may lower your premiums.
If you have existing health problems that could lead to your inability to work, or your job is considered dangerous, it's unlikely you will be eligible for this cover. It doesn't cover you if you lose your job.
Critical illness cover
Critical illness cover is a long-term insurance policy that pays out a tax-free lump sum if you're diagnosed with one of the serious illnesses that your policy covers like heart attack, stroke and certain types of cancer. You can then use this money to pay off your mortgage or for medical bills. It won't pay out if you die suddenly, like in a car accident. Check carefully what illnesses are and aren’t covered by your policy.
You can also buy critical illness and combine it with life insurance or mortgage protection.
Don't forget employee benefits
Check if you're eligible for free or discounted rates on private medical or life assurance through your employer and what you're already covered for.
Information from other sources
Find out more about Life insurance in the Money Advice Service insurance guide