COVID-19 has devastated thousands of families up and down the UK. As well as damaging the wider economy, the pandemic has also impacted a significant percentage of people’s personal finances.

This has led to a substantial increase in the number of people purchasing financial protection policies to protect themselves and their loved ones. This article in iNews.co.uk suggests there has been an 18% rise in the purchase of life insurance policies – particularly among young adults and women.

Furthermore, income protection has experienced a surge in popularity since the pandemic hit – with research by top insurer Zurich suggesting that interest in this form of cover has increased by a third since the first lockdown.

But what is the better option, life insurance or income protection? Let’s start with the basics…

What is life insurance?

Life insurance is simply a financial safety blanket for an absolute worst-case scenario. The policy will pay out to your loved ones if you pass away to help them take care of crucial financial obligations

You determine how long you require cover for (the term), normally this will be until your mortgage is paid off and/or your children are financially independent. You can shop around for term life insurance quotes to find something that fits with your family’s plans.

You also specify the cover amount (sum assured), how much would your loved ones need to cover the mortgage and future living costs if you were no longer around to provide for them.

What is income protection insurance?

In comparison to life insurance, which pays out when you pass away, income protection pays out to you during your working life.

It replaces a percentage (usually between 50% and 70%) of your income if you are unable to work for a long period of time due to injury or illness.

But which is the best policy option to meet your needs and budget?

We asked award-winning insurance broker Reassured to compare life insurance vs income protection to help you make an informed decision.

Income protection insurance

• Protects your income if you are unable to work due to an accident or sickness
• Pays out up to 70% of your gross salary
• Long term and short term policy options available
• Protects you for a set term
• Policies to suit every need
• The younger you are, the cheaper the premium
• Cover starts from 50p-a-day

Income protection works by paying out a percentage of your income in the event you are unable to work due to an accident or sickness, ensuring you are still able to take care of essential financial commitments.

Income protection typically pays out between 50 – 70% of your gross income. As opposed to a lump sum payout (as with life insurance), you will receive tax-free monthly instalments which can help with family living costs whilst you are unable to work.

Your monthly income protection payments begin after the deferred period has elapsed and continued until either:

• Your payment period ends
• You retire
• You return to employment
• Your policy expires

The deferred period is the time between your first sick day and the day you would like your monthly payments to start. The length of this deferred period is determined at the point of application and cannot be changed.

What types of income protection are there?

There are three forms of income protection available, and for all of these you can decide on either a short or long term policy option;

1. Own occupation
   This option offers the most comprehensive protection, and you are able to make a claim if unable to fulfil your specific occupation. You will not be asked to carry out a different job role by the insurer
2. Suited tasks
   Here you will only be able to make a claim if you cannot carry out your job or another job that matches your skillset and experience. This means if you cannot perform your usual job role, you may be asked to take on a similar, suitable role
3. Any occupation
   With any occupation, you will only be able to make a claim if you are unable to carry out work of any description. Often, this definition of incapacity requires total disability for a claim to be successful, and therefore it is pretty limiting

What can income protection cover?

As mentioned above, income protection payments are used to cover an income that you have lost. Typically, this involves protecting;

• Mortgage payments or rent
• Household bills
• Family living costs
• Childcare expenses
• Travel and leisure expenses
• Outstanding debt

How much does income protection insurance cost?

Like any form of insurance, the cost is determined by the risk posed to the insurer, or put another way, the likelihood of a claim.
There are many factors which an insurer will consider when calculating the cost of your cover, including;

• Your age
• Whether you have any pre-existing medical conditions
• Whether you smoke
• Your lifestyle (high-risk hobbies)
• Your occupation (is it high-risk?)
• Type of income protection policy
• Length of policy term
• Length of the deferred period

Although it is possible to secure income protection from £5 a month, premiums will increase depending on your individual situation and the above criteria.

Who is income protection suitable for?

Income protection can be suitable for anyone who wants/needs to protect their family income. However, if you are self-employed and cannot rely on an employer to provide sick pay, then income protection could be more suitable. This need for income protection cover can be heightened further if you have no significant personal savings to fall back on either.

Life insurance

• Protect your family and home
• Term (level and decreasing) and lifelong (whole of life) options available
• Cover protection for up to £1,000,000
• Pays out a single cash lump sum
• Protection to suit every need
• The younger you are, the cheaper the premium
• Cover from 20p-a-day

Life insurance is much more common than income protection and provides your loved ones with a lump sum cash payout if you were to pass away during the policy term.

There are various policy types available to meet differing life needs and the cost depends on your individual circumstances.

What types of life insurance are there?

The most common policy types are level term and decreasing term life insurance.

Both forms of cover are term-based, and therefore protection lasts for a set period of time. If you outlive the policy term then no payout will materialise and the policy expires.

With level term cover, you set a fixed sum assured, you pay a set monthly premium and determine a term length. If you pass away within the policy term, then a cash lump sum is paid out to your loved ones.

Decreasing term cover mirrors level term cover in every way other than the payout amount, which decreases over the term of the policy – making it ideal for covering a repayment mortgage. Because the risk to the insurer reduces over time, this option is cheaper than level term cover.

There are also lifelong forms of life insurance too, like whole of life insurance and over 50 plans, which are tailored to those in later life and guarantee a payout. These forms of cover are usually taken out specifically to cover rising funeral costs and/or to provide an inheritance.

What can life insurance cover?

Many people decide to take out life insurance after a major life event, such as having their first child or buying their first home. However, recent research also suggests the COVID-19 pandemic has also prompted many people to seek life cover. 

A life insurance lump sum payout is commonly used to; 

• Clear a mortgage
• Clear outstanding debts
• Cover future family living costs
• Meet childcare expenses
• Cover funeral costs (total cost £9,263)

How much does life insurance cost?

As with income protection, the cost of your life insurance is determined by the level of risk you pose to the insurer. The greater the risk, the higher your monthly premium.

Your age is again the most influential factor because as we age the likelihood of a pay out increases. As a result, the younger you take out cover, the cheaper it will be.

In fact, you can take out approximately £200,000 of cover in your early 20s and lock in a super low monthly premium (20p-a-day) for a 40-year term.

The key criteria include;

• Age
• Medical history
• Policy type
• Term length
• Sum assured
• Smoking status
• Weight/BMI

How to reduce the cost of premiums

When it comes to monthly outgoings, no one wants to pay more than is necessary, especially at this time when many families are struggling financially.

Luckily there are a number of things you can do to ensure you secure the right cover, at the best price, regardless of whether you decide on income protection or life insurance.

Top tips include;

• Take out cover while you are young and lock in a low premium for an extended term
• Compare multiple quotes as costs can vary wildly between insurers. Use an FCA regulated broker or a comparison website to save time
• Only take out the level of cover you need. Take time to calculate your specific requirements, so you do not pay unnecessarily for more cover than is required
• Only take out cover for as long as you need. Take time to calculate how long you require cover protection, i.e., until the mortgage is paid off and/or until the children are financially independent
• Offset your personal protection against any cover you receive through your employer, like death in service
• Consider a joint policy, which can be up to 30% cheaper

Conclusion

Income protection

Life insurance

Provides protection during your working life Will payout to you if you become too ill or injured to work Payout is made in monthly (tax-free) income payments Payments can be used to help cover essential financial commitments such as mortgage payments, rent, bills, food shop etc Cover can be short term (maximum of 2 years) or long term (cover-up until retirement) You will be required to pay monthly premiums to keep cover valid

Provides financial protection to your loved ones after your passing Will payout to your loved ones if you pass away (during the term of your policy) A cash lump sum payout is made to your loved ones Payout can be used by loved ones to cover the remaining mortgage balance (and remain in the family home), cover living costs, as well as funeral costs or provide an inheritance Cover can be for a specified period of time (term) or lifelong (whole of life) You will be required to pay monthly premiums to keep cover valid

Hopefully, this comparison has been helpful in providing information about life insurance and income protection and how the two policies differ.

Ultimately, whether life insurance or income protection is right for you will depend on what you want to cover and your available budget.

For those wanting a comprehensive financial protection solution, it’s possible to secure both life insurance to protect your loved ones after your passing as well as income protection to provide cover while you’re alive.

Speaking to an expert is always the best way to gather the information you need to make a fully informed decision on what protection will best meet your needs.