Understanding life insurance, critical illness cover and income protection insurance

Understanding life insurance

This blog is general information only. It isn’t advice, and isn’t an insight into the views of TSB or any of our Partners.

We unfortunately can’t see into the future. So, if you were to suddenly pass away, how would your family cope financially? For example, could they continue to pay the mortgage or continue their current lifestyle?

Or what if you become one of the one million people in the UK per year who are unable to work due to illness or injury? 40% of the UK’s working-age population has less than £100 in savings. Although you may be eligible for Statutory Sick Pay (SSP), at just £92.05 a week and for a maximum absence period of 28 weeks, this might not be enough to cover all your outgoings such as your mortgage, household expenses and bills.

The added burden of financial pressures can make dealing with an already tough situation even more difficult. So, it might make sense to take out life insurance, critical illness cover and/or income protection insurance. But how do they differ, and what are your options?

Understanding life insurance

What is life insurance?

Life insurance, sometimes known as life cover or life assurance, pays out a fixed cash lump sum to your loved ones if you die during the length of your policy.

The most common type of life insurance is “level term” life insurance, which means you pick the size of the pay-out, sometimes known as the sum insured, and the amount of time you’re covered for, otherwise known as the term. Everything is fixed throughout the length of the policy – the pay out, the term and the premiums. Once the policy is up, your cover simply lapses.

You may also come across “decreasing” life insurance, which is designed to help protect a repayment mortgage. This means the amount of cover reduces over time and reduces roughly in line with the way a repayment mortgage decreases.

The type of policy you choose will depend on what you want covered.

What is critical illness cover?

Critical illness cover either comes as an add-on to your life insurance, or as its own separate insurance, paying out one tax-free lump sum if you are diagnosed with one of the illnesses specified in the policy. For example, some policies will cover heart attack, stroke and some types of cancer. A one-time pay out gives you the flexibility to use the money as you wish, and once you’ve made a claim your policy ends.

What is income protection insurance?

If you fall ill or suffer a disability, income protection insurance will pay out a set amount of money, tax free, each month until you retire or are able to return to work.

When you take out a policy you’ll agree on a waiting period – generally between one and 12 months – and the longer this period is, the lower your monthly premiums usually are. Following that, you’ll receive a percentage of your income (usually 50-70%) on an ongoing monthly basis. It’s important to ensure you will be able to manage financially during this waiting period, so you will need to set aside some savings or be able to rely on a separate source of income. There will also be caveats as to what you’re covered for, based on your age, lifestyle and pre-existing conditions.

Unlike critical illness cover, you can make multiple claims with income protection insurance - for as long as the policy is valid. It’s worth considering this type of insurance if you would find it hard to cope without a regular monthly income, and can be particularly useful if you’re self-employed or your employer doesn’t offer additional sick pay on top of SSP.

Also, income protection insurance doesn’t cover you for redundancy. If this is something you would like to consider, you should look into taking out short term income protection (STIP). This pays a set monthly amount over a much shorter period – usually between one and two years – if you are made redundant or suffer an accident or illness.

Understand your financial requirements

To make sure you’re in the best possible place should you be unable to work, it’s important to fully understand your financial situation and ongoing needs before taking out any cover.

What are your monthly outgoings and how much do you need to live on? This will give you a good guide as to how much cover you need. What savings do you have and is this enough to tide you over until the insurance kicks in? Does it mean you could choose a lower value policy? Also, don’t forget to allow for unexpected costs related to an illness or injury, such as medical charges, rehabilitation or any necessary modifications to the home.

If you’re ever in any doubt over what to do, seek independent financial advice for help.

No one knows when, or if, they may need time off work due to illness or injury. But if something does happen, the last thing you or your family want to worry about is your finances. So, by taking out life insurance, critical illness cover or income protection insurance, your loved ones can enjoy valuable peace of mind both now and into the future. Your choice of cover and policy will be dependent on your individual circumstances, so make sure you research all your options to make the best decision for your needs.


Everything we publish on Straightforward Money is provided as general information only. It isn’t advice, and isn’t an insight into the views of TSB or any of our Partners.

Please think about getting independent financial advice if you want help with your personal situation.

We try really hard to make sure everything’s accurate when we publish it.  But the information can sometimes become out of date.  For example we might link out to sites that we like or think might be helpful, but that link may have been replaced by the other site.

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