In this blog we will explain the differences and uses of critical illness and income protection, and how they can be used to protect your financial position.
In 2014 in the UK, Critical Illness cover outsold Income Protection by 5 to 1. In numerical terms that’s around 1 million people Vs 200,000.*
What is income protection?
Income Protection is insurance which will provide a regular replacement income if you are unable to work due to injury or illness. The insurance is suitable for a variety of people, including business owners, directors and employees. With personal cover, the income is tax free.
What is Critical Illness?
Critical illness is a long-term insurance policy which covers a list of specific medical illnesses, the types of illnesses can differ with different providers. If you unfortunately get one of the listed illnesses, the policy will pay out a tax-free lump sum.
Why do I need protection?
Only a minority of employers support their staff for more than a year if they are off sick from work, this is mainly due to being unable to assist for a lengthy period of time. State benefits aren’t enough to keep you afloat for an extended period of time, therefore everyone as either an employer or employee should consider some form of cover.
Critical Illness V Income Protection
Most people within the advisory industry would say Income Protection is the insurance that provides the best comprehensive cover. There is however room for both on the market.
Below are the main deciding factors between the two:
Income protection, in the majority of cases, is more cost effective than critical illness. But it is always dependent on the individual. For example, a quote for a 35-year old covering £250,000 over 30 years would cost £90 a month through critical illness, whereas it would be around £30 a month through income protection.*
- Scope of cover
Theoretically, with some exceptions, income protection covers all medical conditions as it is based upon whether you can fulfil your regular and daily employment duties. The most common reasons for claiming with an income protection policy are stress and back problems, and these conditions are not normally covered under CI policies. Critical illness only covers what is specified in the policy. Therefore, invalidating your policy if you were to get a medical condition that isn’t listed. Also, a CI policy often ends when a claim is paid out whereas multiple claims can potentially be made under an income protection plan.
- Dividends and income
Income protection policies have previously struggled to cover dividends and were just able to cover salary. With many directors taking low salary but high dividends out of their companies, critical illness was a more suitable option. However, things have changed meaning income protection now covers both income and dividends, therefore the majority of people are eligible for both protection plans.
- Other benefits
Many income protection plans offer rehabilitation to help the policyholder back to work, this works well for the provider as well as reducing the amount paid out if the policyholder can get back to work.
Critical illness will help to alleviate immediate financial stress by paying out a lump sum to help pay off things like mortgages and potentially pay for treatment. However, how useful would a mortgage-free house be if you couldn’t afford to pay the bills?
Protection is always sold on an individual basis so if you have any queries please get in contact.
The old adage that a business is only as good as its employees is an important one to remember when it comes to insurance.
Here at Ascendis, your local accountants Cheshire, we believe a firm’s workforce is the most important investment. It will make choosing the right package of insurance a crucial way of protecting that investment. Changes to your workforce can have dramatic effects on a business’ ability to operate, from removing key expertise to inadvertently damaging important relationships.
A tailored insurance policy will offer both the wider business and the individual employees financial protection in the face of unforeseen occurrences. Every business has a unique constellation of personalities, skills and experiences and there is no one-size-fits-all approach to protection. To accurately work out the level and types of cover you are going to need, make sure to consider the following:
Analyse your threats
Any plan should be rooted in careful and thorough analysis. Conducting a SWOT (strengths, weaknesses, opportunities and threats) analysis will show you the weakest points in your business. Which teams or employees would cause the most disruption or harm if something should happen to them? Are these people client facing or more important internally?
Don’t over insure
Being prepared is always good, but being overly cautious may mean that you limit yourself in other areas. If you are paying expensive premiums, you may have tied up resources that could be better spent on internal training, marketing or product development.
Protecting your operations
The first strand is to ensure that the organisation can maintain its operations in the face of major changes to its workforce. Below are important insurance policies to consider.
Key person insurance:
While your team as a whole is important, there may be one individual who is a particularly important cog in the machine. This person may be the creative, organisational or motivational centre of your operations or may have a privileged relationship with your key clients. Either way, losing them because of death or critical illness could have major effects on your business’ ability to generate income. Key person insurance is a mix of life assurance, critical illness and income protection that aims to allow a business to continue trading in a period of financial pressure and uncertainty.
Key person insurance can provide cover for:
- loss of profits over the period of time it takes to find and fully integrate a replacement
- recruitment and training costs
- income paid to the individual if they cannot work due to critical illness or injury (plus the costs of temporarily replacing them).
The death of a shareholder can have wide-ranging effects, potentially impacting both the financial health of the business as well as the deceased’s family.
The deceased’s surviving family will become entitled to their shares and while they could step into their vacant position, they may want to sell their shares. It may also be in the remaining shareholders’ interest to buy out the deceased’s family in order to retain a degree of stability.
If you have the same beliefs as us about how important your workforce is and would like to discuss your insurance options get in touch on 0845 054 8560.
Personal Guarantee Insurance (PGI) provides insurance for individuals (usually Directors) who have given a Personal Guarantee to a lender in respect of the borrowings of the limited company in the event that upon insolvency of the company, if the company is unable to repay the whole of the borrowings and the guarantee is called upon, then the insurance can indemnify the Guarantor.
PGI is available against a number of Limited Company borrowings:
- Invoice finance
- Asset based lending
- Commercial finance
- Other secured borrowings
- Unsecured borrowings
- Peer-to-peer loans
Why is Personal Guarantee Insurance Unique?
The PG insurance is the first of its kind to provide protection and advice at the same time. The policy can be purchased at any time either for an existing guarantee or as finance is taken out.
How it works
The guarantor is insured in the event of the company entering into insolvency and failing to pay back it’s lender in full. Cover starts at 60% for each guarantor of the amount of the guarantee in year 1, up to 80% in year 5 and subsequent years.
Length of time % Covered
Year 1 60%
Year 2 70%
Year 3 and thereafter 80%
The premium is based on the level of the cover required. There is a simple online application form which will provide you with an instant quote based on your requirements. Click here to access the form.
We would also welcome a meeting with you to discuss other products of finance which could help the running of your business.
Ascendis Business Finance do not offer advice or services in this area of insurance. We have partnered with Purbeck Insurance Services, a trading name of Purbeck UK Limited who exclusively offer Personal Guarantee Insurance (PGI) on behalf of Markel International, an A-Rated Fortune 500 insurance company.
By clicking the link above you will be transferred to the website of Purbeck Insurance Services.
The annual premium is calculated based on the applicant circumstances and the individual requirements of the applicant. Successful applicants will have a choice to pay the premium upfront in full or via a monthly direct debit instalment facility.