Life Insurance and Income Protection
Three types of cover, when each one makes sense, and how to think about whether you need them.
This page covers general information about protection insurance. It is not financial advice. Protection insurance is a regulated activity. Always consult a qualified independent financial adviser or protection specialist for guidance specific to your situation.
The three types of protection
Financial protection insurance falls into three broad categories. They are often confused with each other, but they serve different purposes and the right combination depends entirely on your circumstances.
Life insurance pays a lump sum or regular income to your dependants if you die. It protects the people who depend on your income.
Critical illness cover pays a lump sum to you if you are diagnosed with a specified serious illness. It protects your finances while you are alive but unable to work due to illness.
Income protection pays a replacement income if you are unable to work due to illness or injury, for as long as you remain unable to work up to the policy end date. It protects your income over the long term.
Each does a different job. Understanding the difference is the starting point for working out what you actually need.
Part 1: Life Insurance
Do you need life insurance?
Life insurance makes most sense if other people depend on your income. The key question is straightforward: if you died tomorrow, would anyone face financial hardship?
Life insurance is likely relevant if you have children or other dependants, if you have a partner who could not afford the mortgage or rent without your income, or if you have significant debts that would create problems for your family.
Life insurance is less relevant if you are single with no dependants, if your family is financially independent of you, or if you have accumulated enough assets that your family would be financially secure without your income.
That last point is worth noting for anyone on a FIRE journey. The closer you are to financial independence, the less life insurance you need, because your investments are progressively replacing the income your work provides. Someone with a portfolio generating a reliable withdrawal income no longer depends on their salary in the same way. Life insurance becomes less critical as that portfolio grows.
How much cover do you need?
A common starting point is ten times your annual income, but a more precise approach is to calculate what your family would actually need:
- The outstanding mortgage or rent for the remaining term
- Years of income replacement until your youngest child is financially independent, or until your partner reaches retirement
- Any other significant debts
Subtract any existing assets, death in service benefit, and existing savings. The gap is broadly what you need to cover.
Types of life insurance
Term life insurance pays out if you die within the policy term, for example twenty five years. It is cheaper than whole of life cover and the right choice for most people with dependants who need income replacement for a defined period.
Decreasing term insurance works the same way but the payout reduces over time, typically in line with a repayment mortgage balance. It is the cheapest option and is well suited to covering a specific reducing debt.
Whole of life insurance pays out whenever you die with no time limit. It is significantly more expensive than term insurance. It is sometimes used in estate planning to cover an inheritance tax liability rather than as straightforward income replacement.
Writing life insurance in trust
If you have a life insurance policy, check whether it is written in trust. A policy written in trust pays your beneficiaries directly outside your estate, bypassing probate and avoiding a potential inheritance tax liability on the payout. This is covered in more detail in the pension and life insurance beneficiaries guide.
Part 2: Critical Illness Cover
What it covers
Critical illness cover pays a tax-free lump sum if you are diagnosed with a condition on the insurer’s specified list. The list typically includes cancer, heart attack, stroke, and major organ failure, but the exact conditions covered vary significantly between providers.
It is worth reading the policy definitions carefully before you buy. Cancer in one policy may exclude early-stage or low-grade cancers that another policy covers. This is one area where using a broker who can compare policy definitions across providers adds genuine value.
When it is relevant
Critical illness cover is worth considering if you have significant financial commitments such as a mortgage or dependants that would be at risk if you were seriously ill, if you have limited savings and could not absorb a period without income, or if you have a family history of serious illness.
Critical illness pays once, as a lump sum. It does not replace your income over a longer period of illness. That is what income protection does.
Part 3: Income Protection
What it covers
Income protection pays a regular income, typically 50 to 70 per cent of your gross salary, if you are unable to work due to illness or injury. Unlike critical illness, it is not limited to a specified list of conditions. If you cannot do your job, you can claim.
It pays until you return to work, reach retirement age, or the policy ends, whichever comes first. This is what makes it the most comprehensive form of protection for working people.
Deferred period
Policies have a waiting period before payments begin, typically 4, 8, 13, or 26 weeks. The longer the deferred period, the lower the monthly premium. Choose a deferred period that aligns with how long your employer pays sick pay, or how long your savings could cover your essential outgoings.
Own occupation vs any occupation
Own occupation policies pay if you cannot do your specific job. Any occupation policies only pay if you cannot do any job at all. Own occupation is significantly better protection and worth paying more for. Check which definition your policy uses before you buy.
Who needs income protection
Income protection is relevant for most working people. It is particularly important for the self-employed, who have no employer sick pay to fall back on, and for anyone whose household depends heavily on a single income. It is one of the most undersold forms of insurance in the UK despite being one of the most practically useful.
Part 4: Where to Buy and What to Check
Check your employer benefits first
Before buying any cover, check what your employer already provides. Many employers offer death in service benefit, group income protection covering a period of sick leave, and private medical insurance. These reduce how much additional cover you need and in turn reduce your premiums.
Comparison sites
For straightforward term life insurance, a comparison site such as MoneySuperMarket or Compare the Market is a reasonable starting point. The products are relatively standardised and price is an important factor.
A protection broker
For critical illness or income protection, consider using an independent protection broker. They are paid by the insurer so there is no direct cost to you. The difference between a well-specified income protection policy and a poorly-specified one can be significant and is not always obvious from a comparison site alone.
A financial adviser
If you want comprehensive advice covering all three types of cover alongside your wider financial plan, a fee-based independent financial adviser can help. This is particularly worth considering if you have complex circumstances or a high income to protect.
What’s Next
With life cover and income protection understood, the final piece of the protection picture is inheritance tax. For most people it will never apply. But for anyone accumulating significant assets over a long investment horizon, understanding how the rules work and how different asset types are treated is worth the time.
This is general information, not financial advice. Protection insurance is a regulated activity. Products, prices, and policy definitions vary between providers. Consult a qualified independent financial adviser or protection specialist for advice specific to your situation.