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Illness insurance

Kim Jones
Kim Jones
Updated 21 April 2022  | 3 mins read

It’s not something we like to think about but if you became ill and were unable to work for an extended period of time, would you and your family be able to cope financially? Would you have enough money in place to pay for specialist care or equipment to help you adapt to your health condition?

If the answer is no, then you may want to think about whether illness life insurance might be right for you.

Illness insurance comes in a few different forms and can step in to help should you become seriously ill or have an accident that leaves you unable to work.

It can provide a lump sum or monthly income to help pay off any outstanding debts, cover your household outgoings or take care of expenses related to your illness.

Key points

  • Illness insurance policies can help replace lost income if you fall ill or have an accident and can’t work for a prolonged period
  • They can pay out a lump sum or a regular monthly income
  • Some illness policy payouts are designed to be spent on your regular outgoings, as well as medical expenses incurred as a result of your condition
  • Other policies will pay off debts like your mortgage or credit card bills

What is illness insurance?

This type of insurance policy is designed to protect you financially should you fall ill with a serious health condition or have an accident that leaves you unable to work for an extended period of time.

You can spend the payout on things like:

  • Your mortgage and other debts
  • Everyday expenses, if your condition means you can no longer work
  • Installing adaptive equipment in your home to help you cope with your illness
  • Specialist care and medical bills

Is illness covered by life insurance?

Life insurance is primarily designed to pay out if you die unexpectedly.

However, you may be able to claim on your life insurance if you’re diagnosed with a terminal illness and are given less than 12 months to live. In this case, your policy can pay out before you die.

Your life insurance will only cover certain conditions though, which will be outlined in your policy information.

Why take out illness insurance?

If you work for an employer, you may be able to get statutory sick pay or occupational sick pay for a set period, if you’re too unwell to work.

Some employers also offer a form of life insurance as an employee benefit that pays out if you die or are diagnosed with a terminal illness during your employment.

You may also be able to claim state benefits if you fall seriously ill.

Despite this, you’ll still need to work out if the money you’d be entitled to would be enough to cover all your outgoings. If it falls short, then it might be worth considering taking out illness insurance to help.

Types of illness insurance

There are a few different types of illness insurance policies that can help cover costs should you be diagnosed with a serious condition.

Critical illness cover

This will pay out a tax-free lump sum if you’re diagnosed with a condition that’s listed on the policy. You can use the money for whatever you like.

You can add this cover to a life insurance policy or buy it as a standalone policy.

Income protection insurance

If you’re unable to work because of illness or injury, this type of policy will pay you a monthly income.

The amount you receive will either be a fixed monthly sum or will cover a percentage of your gross annual salary (normally up to about 70%). You can buy a policy that lasts your entire life, up to retirement age, or until you return to work, whichever is sooner.

Alternatively, you can buy a short-term income protection policy that will only make payments for a set period of time. Your payout will only be made after a deferral period has passed – this could be from a few weeks up to a year. You can choose the deferral period length, but it’s worth noting that the shorter the deferral period, the more expensive your premiums will be. You’ll need to ensure you have enough funds in place to cover your costs during the deferral period.

Payment protection insurance (PPI)

This type of cover has a bad rap because of the PPI mis-selling scandal, but it can be a useful form of protection. It covers your monthly repayments on a single debt (your mortgage or a personal loan, for example) if you have an illness or accident that leaves you unable to work.

Loan protection insurance

In a similar way, this form of income protection is designed to cover loan repayments. But, unlike PPI, it’s not tied to one singular debt. You can use the monthly payments to pay off any debt you choose, whether it’s your mortgage or credit card repayments. You choose the level of cover up to around 70% of your gross annual income and payouts will normally be tax-free.

Mortgage payment protection insurance (MPPI)

MPPI covers the cost of your mortgage payments if you find yourself unable to work due to accident or illness. Most MPPI plans will usually pay out for a maximum of 12 months.

Can I get employer’s sick pay or claim my pension early if I fall ill?

All employers are legally obliged to pay statutory sick pay to employees who qualify. But some opt to pay employees contractual sick pay, also called company sick pay, instead. This is paid at a higher rate than statutory sick pay.

Sick pay will only last for a set number of weeks, though.

Depending on their rules, some companies may allow you to access your pension early due to ill health without any early retirement reductions, if you can prove you’re permanently incapable of continuing your employment.

Ask your employer for details of the benefits you’re entitled to if ill health means you can’t return to work.

What support is there for the self-employed?

If you’re self-employed you can’t rely on statutory sick pay from an employer if you fall ill.

However, you may qualify for state benefits like the Employment and Support Allowance (ESA).

This may not be enough to make ends meet and cover regular expenses like your rent or mortgage, utility bills, food or if you have a family to support.

Does illness insurance pay out on diagnosis?

A critical illness policy will usually pay out on diagnosis.

With other types of illness insurance, like income protection insurance, you’ll usually need to wait for the deferral period to conclude before you can start receiving your payout.

What should you consider before taking out illness insurance?

Check that you don’t already have some sort of illness cover included on another insurance policy - such as MPPI.

You may also want to investigate whether your employer offers a benefit package that pays out if you suffer long-term sickness.

What isn’t covered?

Not all illnesses and conditions are covered by illness insurance policies, so check the terms and conditions carefully. For example, critical illness cover might not include some types of cancer, or an illness might have to be particularly severe or leave you permanently disabled to qualify for a payout.

Pre-existing conditions - or illnesses that arise as the result of a pre-existing condition - may also be excluded.

Check the terms and conditions of your policy carefully before deciding if it’s right for you.