Life Insurance and Critical Illness Cover

Life Insurance and Critical Illness Cover

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Life insurance and critical illness cover: what’s the difference and do you need both?

Deciding on which insurance policies to invest in can be tricky.

Please read this blog to learn more about life insurance, critical illness cover, the differences between them and whether you need either, neither, or both!

What is life insurance?

Life insurance (otherwise known as life cover or life assurance) is a policy that pays out a lump sum of money when you die.

A life insurance pay-out provides your family with a financial safety net when you’re no longer here. They can choose to use the money however they’d prefer; whether that’s paying off the mortgage, covering funeral costs, or taking care of household bills.

The size of the lump sum depends on the level of cover you choose; the more you pay toward the policy, the bigger the pay-out.

Life insurance is often taken out as part of a mortgage investment. Having life insurance can also be reassuring if there’s someone in your life who is financially dependent on you, such a child – if you were to die, your dependants would be financially protected.

What is critical illness cover?

Critical illness cover, also known as critical illness insurance, is a long-term insurance policy that pays out a single, tax-free lump sum if you become ill.

The policy usually covers a set number of conditions you could be diagnosed with during a policy term, often including cancer, a stroke or a heart attack.

Illness can strike at any time and can cause significant financial stress, especially if you’re left unable to make a living for any length of time.

The lump sum can be spent on whatever you see fit, from paying the mortgage and covering monthly costs, to making necessary alterations to your home such as wheelchair access.

What’s the difference between life insurance and critical illness cover?

Life insurance and critical illness are very similar policies in many ways; they both provide a tax-free lump sum when something bad happens, giving you peace of mind in the meantime.

The key differences between the two policies are:

  1. The stage at which the sum is paid
  2. Who the sum is paid out to
  3. How much the policies cost.

Life insurance pays out upon the event of your death and goes to your family (or whoever you’ve designated to receive it). Whereas a lump sum from critical illness cover is paid out to you when you fall ill with any illness specified in your policy.

Critical illness cover is typically more expensive than life insurance. This is because you’re statistically more likely to become ill than die, so critical illness policies are more likely to be claimed upon.

Both policies give you a certain peace of mind that should something awful happen to you – whether death or severe illness – money won’t be an immediate problem.

Do I need life insurance or critical illness cover?

Both policies have their own specific merits and could be helpful depending on your circumstance.

A key consideration is whether you have a family, partner, or other dependants who rely on you financially. If something were to happen to you tomorrow, would their financial security be in jeopardy?

If you’re self-employed, these kinds of policies can provide you with invaluable financial protection. However, if you’re employed by a business, they may well offer similar benefits.

Some businesses enrol their employees in a Death in Service policy, which pays out a lump sum to loved ones if the policyholder dies. In this case, you might not feel the need to take out life insurance, however, these sums are typically far smaller than life insurance pay-outs.

The same could be said for critical illness cover. You might be confident that your employer’s long-term absence policy would cover you if you were to become ill. However, you won’t receive the lump sum that critical illness cover provides.

Can I take out both life insurance and critical illness cover?

You absolutely can take out both – it’s quite common for people to invest in critical illness cover as they purchase life insurance.

When purchased together, the two types of policy form a single insurance product. For the duration of your policy, you will receive a lump sum if you fall ill or if you die. However, there will only ever be one pay out – so if you fall ill and receive a lump sum, you won’t receive another sum when you die.

To get around this, some people choose to purchase separate life insurance and critical illness cover. This can allow for a bit more flexibility; however, it may well be a more expensive option.

Like all financial investments and decisions, there’s no one right way to do things. At HWIFM, we offer financial guidance based on your unique circumstances – it’s not about what’s best for everyone, it’s about what’s best for you.

Get in touch with us to learn more about life insurance and critical illness cover, and to talk to one of our friendly experienced financial advisers.