Critical Difference in Financial Protection

2011: The Good Doctor - Lance Daly

As Independent Financial Planners that protect our clients, it is important that there is a good understanding of the different types of financial protection. Those that cause the most confusion tend to be Income Protection (unhelpfully sometimes called Permanent Health Insurance - PHI) and Critical Illness Cover (CIC or sometimes called Serious Illness Cover).

In simple terms, Income Protection would provide you with a regular monthly income if you are unable to work due to a long-term or serious illness. It would pay this until you are better or you reach the policy end date (normally your retirement date) whichever is the soonest. It does not cover all of your income - as this might be a deterrent to attempting to return to work (perhaps the State system could learn from this). The benefits are paid directly to you personally if you took out the cover, if your employer did, then it pays the employer who then passes it on via payroll. Typically claims are due to back problems, long-term illness such as depression, ME and disability.

Critical Illness cover is completely different, it provides (generally) a one off lump sum of money. This can be used however you like. Some would use it to clear a mortgage or debts, thereby reducing financial pressure. It could be used for a variety of things - medical treatment, care, something you always wanted to do, providing income - whatever - it is up to you. The reason it pays out is because you have a serious illness - by which I mean something like cancer, heart attack or stroke. Life threatening.

The two types of cover might overlap - the thing about medics these days is that they are very good at their jobs and keep us alive, which is good surely... well of course, but being seriously ill and unable to work is not that great unless you have resources. This is where you either have insurance (as above) or you use your savings and investments to do the same job - we call this "self-insuring". The problem with financial protection insurance is simply that you need it most when you can least afford it. Sad reality. I have never met someone that wanted to claim against a policy when taking one out - but its there if they need the cover. Of course how much cover is needed is a different discussion and something that needs to be thought through. After all, what would you do if you were told your spouse has cancer and 6 months to live? you may want to reflect on life, your values, commitments and your work.  This is also where our advice is invaluable.