The three main types
| Type | Pays out when… | Pays… |
|---|---|---|
| Life insurance | You die during the term | A lump sum (or regular income) to your dependants |
| Income protection | You can't work due to illness or injury | A monthly income — typically 50–70% of earnings — until you recover, the term ends, or retirement |
| Critical illness cover | You're diagnosed with a specified serious condition | A one-off lump sum |
They answer different questions. Life insurance protects people who depend on you; income protection protects you; critical illness softens the financial shock of a major diagnosis. Many planners' rule of thumb on priority: income protection is the most-needed and least-bought of the three, because long-term illness is far more common during working life than death — but priority genuinely depends on circumstances.
Who tends to need what
- Dependants + debts: if anyone relies on your income — partner, children, joint mortgage — term life cover is usually the first conversation.
- Self-employed: no sick pay makes income protection particularly relevant.
- Employed: check what your employer already provides — death-in-service (often 2–4× salary) and group sick pay can change what you need to buy privately.
- No dependants, no debts: you may need little or no life cover at all — insurance is for financial consequences, not for its own sake.
The vocabulary that changes payouts
- Term vs whole-of-life: term cover runs for a set period (e.g. until the mortgage is repaid) and is far cheaper; whole-of-life pays whenever you die and costs accordingly.
- Level vs decreasing: decreasing cover shrinks with a repayment mortgage balance and is cheaper; level cover stays constant.
- Deferred period: on income protection, how long you wait before payments start (4, 13, 26, 52 weeks) — longer deferral, cheaper premium; match it to savings and sick pay.
- "Own occupation": the definition that decides whether income protection pays when you can't do your job, or only when you can't do any job. This single clause is one of the biggest quality differences between policies.
- In trust: writing life insurance in trust can keep the payout outside your estate and speed it to beneficiaries — commonly overlooked, usually free to set up.
The honesty rule
Insurers can decline claims if questions weren't answered fully at application. Disclose health and lifestyle facts completely — a slightly higher premium on an honest application is worth infinitely more than a cheaper policy that won't pay.
Where advice fits
Protection is commonly sold through advisers and brokers who are paid commission by insurers — they must tell you how they're remunerated and what they searched. Policy quality varies enormously in ways that aren't visible in the premium, which is a genuine argument for advised purchase here. As always: verify any adviser on the FCA Register, and use our vetting toolkit before engaging anyone.
About this guide: general education only — not regulated advice, not a personal recommendation, and not a financial promotion of any insurer or policy. Cover, definitions and exclusions vary by policy; what suits you depends on your circumstances. FinancialAdvisor.co.uk is not an FCA-authorised firm.