What is the difference between life insurance and income protection?

August 29th, 2022
What is the difference between life insurance and income protection?

It’s useful to know the difference between life insurance and income protection policies. These two types of insurance are important, but they protect different things. There are also various different categories of life insurance and income insurance. In this article, we’ll cover everything that you need to know.

How do life insurance and income protection policies differ?

In essence, life insurance exists for when you die, and income insurance, also known as redundancy insurance, is there for when you are unable to work. Both are a type of financial insurance to help protect you or your loved ones in either situation. Policies designed to protect your income are also sometimes called redundancy protection. Here are the basic things to know:

What to know about Life insurance

Life insurance is designed to pay your family a lump sum if you die during the term of the policy, or if you are diagnosed with a terminal illness and expected to pass away within a year. The insurance offers crucial financial support to your loved ones so they can pay the bills and continue to meet their financial needs. The lump sum payout can also be used to pay off a mortgage, pay for the funeral, cover education or childcare costs, clear debts or meet general living expenses. You can choose the level of life insurance that you would want to have in place for your family if the worst were to happen.

You can also choose how long your policy lasts. When it finishes, the cover stops and there is no payout if you do pass away. The policy also comes to an end if you stop paying your premiums or if you successfully make a claim. There is no cash-in value for a life insurance policy at any time.

What is income protection insurance?

This type of insurance is there to provide you with a monthly payment if you can’t work because you are injured or ill, or sometimes because you have been made redundant. There are various different types of policy with their own terms, but for each, if you successfully make a claim, you receive a set monthly payment to cover your bills and living expenses for a pre-defined amount of time, until you can return to work or until the policy ends.

What to know about income protection insurance in the UK

These policies don’t usually meet your entire financial outgoings or lost earnings, but they are designed to meet most of these costs so that you can still pay your bills and maintain as normal a life as possible. It also provides a degree of financial security for your family members who rely on your salary. [1] For many people, it is unrealistic to build up a large enough pot of savings to meet all the financial needs of your family if you were to be out of work or to pass away. These policies work in different ways to provide financial peace of mind if you were to find yourself in difficulty.

Again, however, if you don’t pay your premiums, the cover automatically comes to an end. There is also no cash-in value to the policy. It’s important to understand the features of these policies before you sign up to them. When you search on Free Price compare you will find full details of each. You can also visit the Citizen’s Advice Bureau online to find out more information about insurance policies and money management in general [2].

What is redundancy insurance?

Redundancy insurance is another name for income protection. Many of these policies will offer you a monthly payment if you are made redundant from your job. There are always specific terms here. For example, you usually cannot take out a policy if you believe that your job is under threat or if you are going through a consultation process.

There is almost always a period of time that must elapse before you can claim. Again, you pay for a defined benefit each month and must keep up your payments in other to keep the policy active and valid.

Can you protect your income for self employed work?

When it comes to income protection insurance self employed people can also benefit from this kind of protection policy. These protection policies are specially designed for the needs of self-employed workers who will not get employer benefits of any kind if they can’t work.

Self employed income protect products work in a similar way to employed income protection policies. They are designed to replace a portion of your income if you cannot work. They generally will not replace your entire income but they will allow you to pay your essential bills and cost of living expenses. The more monthly income you would want to receive from your protection policy if you were out of work, the higher the cost.

How much does income protection insurance for self employed cost?

This depends on your individual circumstances and needs, as well as the costs levied by the insurer. For example:

  • If your role is risky, your premium will be more expensive because there is a higher risk of you having an accident or getting ill. For example, if you work on a construction site, your risk will be higher than if you work at a desk.
  • Your health, because pre-existing conditions may mean that you are more likely to be unable to work. Some pre-existing conditions will be excluded from your cover.
  • Your age, because your risk of becoming ill or injured increases as you get older.
  • Your desired level of protection – the more money you need, the more you’ll pay for the benefit
  • When you want the policy to end. The usual rule is that the longer the policy duration, the higher the premium because you have the maximum duration of protection.

What are the different kinds of life insurance?

There are two main types of life insurance to choose from – level term cover and decreasing term cover. They are used in different ways, depending on whether you want your life insurance to pay off a lump sum such as your mortgage or if you want to leave a fixed sum for your family to help provide for them financially. You can take out life insurance whether you work or whether you are a stay-at-home parent looking after dependents. The important feature of these policies is that they will ensure financial security for your dependents and loved ones if you pass away, and you choose who will benefit from your life insurance policy. [3]

Level term life insurance

With level term life insurance, the policyholder chooses how much cover they need and the length of time that they need it for. The same monthly premium is paid during the entire length of the policy. If you die during the term of your policy, and a successful claim is made by your dependents, the policy pays them a lump sum.

Level cover life insurance policies help people ensure their families can continue to meet their financial needs and maintain their lifestyles. The lump sum can be used to replace your salary or to meet everyday costs, such as mortgage payments, university fees, bills and so forth.

Considering inflation in your life insurance policy

It’s important to factor inflation into this calculation. Because the money cost of the insurance policy remains fixed, the cover sum doesn’t adjust for living cost rises. You can adjust for this by choosing a policy that protects against inflation effects, so that your lump sum retains its true value. However, your premiums will usually increase over time to reflect this. When you choose an inflation-protecting life insurance policy, you can pay up to 15% more for your premium each year.

Decreasing cover life insurance

With decreasing cover life insurance, your cover decreases over the term of the policy, but you still pay the same monthly payment. As the lump sum value decreases over time, these types of policy tend to cost less. Decreasing cover life insurance policies are generally chosen to run alongside mortgages or other long-term loans. They are also called mortgage protection insurance. Because the policyholder continues to pay the mortgage down over time, the policy value itself can decrease to match the outstanding mortgage sum. The mortgage value and insurance cover decrease together.

Can I take out both forms of these policies together?

Yes, although they are designed for different purposes, they work together to help ensure that your financial security is in place. Together, the policies ensure that you can continue to pay your bills if you are unable to work for a certain reason such as sickness or redundancy, and that your family will still be financially secure if you were to pass away before retirement.

These policies are often highly affordable, especially life insurance. You can adjust certain factors to keep the costs to an acceptable level for your needs, whilst balancing out the income or lump sum that you or your dependants would receive if a claim needed to be made. For example, to adjust the policy price you can look at:

Finding the right provider: different providers charge very different premiums for their income and life insurance policies, especially if they offer specialist products such as self employed income protect policies. By using a comparison site such as Free Price Compare, you can easily enter the details for the policies and cover that you need and then see the most competitive prices that you might be offered.

Choosing the right level of cover: the more cover you take out, the more your monthly premium will be. The easiest way to drop it is to choose the right level of cover for your needs. When you use Free Price Compare, you can see the effects of different cover levels to make the right decision.

Choosing your term: The longer your policy duration, or payout period for income insurance products, the more expensive your policy will be.

Maintaining your health. If you are overweight, smoke, or drink above the recommended alcohol units per week, you will probably pay more money for your insurance policies. This is because there will be a higher degree of risk when it comes to your health. You can’t change your age but you can affect your health risks by choosing to live a healthier lifestyle wherever possible.

Should I take out life insurance and income insurance?

This will depend on your unique needs and circumstances. It’s always important to understand the terms of each policy carefully so that you aren’t paying for a policy that you couldn’t ultimately claim on – particularly with protection policies for redundancy. You can also get unbiased advice and help from a range of consumer advice organisations such as The Money Advice Service [4].

If you have a large amount of savings, you may feel that these products aren’t necessary, particularly where it comes to income protection. Equally, you may be working in a situation where an income insurance policy wouldn’t actually payout because of your circumstances. The general recommendation is to have 3-6 months’ worth of income in savings as a basic safety net. If you have this in place, then you may feel that an income policy isn’t necessary for you. You may still feel that life insurance is a worthwhile investment, however.

Where can I find the latest insurance products online?

Here at Free Price Compare, you can instantly see the latest insurance products online and get immediate quotes simply by providing some basic information. Change your desired protection levels and other criteria to see the effects on your monthly policy payment and apply directly online when you see the policy that best matches your needs. Our service is completely free and we only list trusted, reputable financial services providers who have the appropriate accreditation and regulations needed to offer these kinds of insurance.

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