Having financial protection in place to provision for a worst-case scenario is always a good idea, especially if you have a family who rely on you.

But which policy type provides the right cover for you, at the best available price?

In the below article we explore the merits of two of the most popular forms of cover; life insurance and income protection – helping provide the key information to enable you to make an informed decision.

What is the difference between life insurance and income protection?

The fundamental difference is that a life insurance policy pays out a cash lump sum after your passing. Whereas income protection pays out each month whilst you are unable to work due to injury or illness.

Whilst a life insurance pay out is made to your loved ones after you are gone, an income protection pay out is made to you (the policyholder).

The most popular life insurance policy comes in two forms: level and decreasing term. Level term cover provides a fixed (or level) pay out amount regardless of when you pass away during the policy term.

In contrast the cover amount on decreasing term policies reduces over the life of the policy (making it ideal for covering a repayment mortgage). As the risk to the insurer reduces after each passing month, decreasing term life insurance is the cheaper option.

Income protection comes in the form of either long-term or short-term cover and both options pay out up to 70% of your usual income, depending on the insurer. This income can help cover the monthly rent or mortgage repayments and meet family living costs.

Long-term income protection has the potential to continuously pay out until you return to work or until the policy expires and as a result it is more expensive. Whereas short term income protection only pays out for a predetermined and limited period; typically, a maximum of 1, 2 or 5 years.

Who is income protection best suits too?

An income protection policy is well suited for those who work as it can replace a lost income. It can be particularly beneficial for those who are self-employed and who cannot rely on full-time sick pay from their employer.

It is also a good option for those who do not have any personal savings to fall back on, those who rent and/or those who do not want the pressure of managing/budgeting a large life insurance lump sum.

Who is life insurance best suited too?

A life insurance policy is well suited for those who have a family and/or a mortgage. As life insurance provides a lump sum it can be used to clear a mortgage debt enabling the family to remain in their home, provide an inheritance and/or cover rising funeral costs. A pay out can help alleviate financial stress at an already challenging time for your nearest and dearest.

In summary, income protection is great if you want to protect your earnings, whilst life insurance is better suited if you want to protect your loved ones after you pass away.

Which policy is more expensive?

The cost of both life insurance and income protection is calculated based on the likelihood of a claim. The insurer will consider key factors such as your age, medical history, smoking status, weight, cover amount and term length.

It is difficult to compare the cost of these two policy types because they are very different; one providing a lump sum pay out and the other a monthly income.

However, based on information provided by leading broker, a 30-year-old non-smoker will pay £4.34 a month for £100,000 over a 20-year term. Whilst the same individual with an income of £30,000 would pay £6.41 for income protection cover until the age of 65.

Statically we are much more likely to suffer injury or illness during a policy term, than to pass away, which in part explains why income protection is usually more costly.

To compare quotes from all the main insurers free of charge see this best income protection insurance guide from Reassured.

Can you take out both life insurance and income protection?

Yes, unlike car and home insurance, it is not illegal to take out multiple life insurance policies. Budget permitting you could secure life insurance to cover the mortgage and leave an inheritance if you were no longer around to provide. And income protection to provide a regular income to cover day to day living costs in case you became too ill or injured to work.

Please note, this would obviously mean paying two separate monthly premiums and so would not be suitable for everyone.

Whichever policy option you choose, compare quotes

Regardless of whether you decide on life insurance or income protection insurance it is vital that you compare quotes from a variety of insurers. This is because the cost of cover can vary wildly between providers, due to differences in underwriting criteria.

If you know the type of policy you require then you could use a reputable comparison website to save yourself time and money. However, if you need additional support or have questions then using an FCA-regulated broker may be a better option.

A broker can help you through the application process, discuss your policy options, unpick the insurance jargon, write your policy in trust and even deal with a future claim. What’s more, most brokers do not charge you a fee (as they earn a commission from the insurer).

In conclusion, there is no policy which is better than the other and it is a case of which best one meets your unique needs, budget, and personal circumstances.

Lastly, if there is one key take away from this article it is that regardless of the policy type you choose, your age at the point of application strongly influences the cost of cover. As a result, a 50-year-old can pay double that of a 30-year-old, and so if you need cover why not seize the day and lock in the lowest possible premium for years to come.