What's the difference between employee income protection and critical illness insurance?

When an employee is away from work due to illness, the impact on your business can depend on the length of the absence. A few days may be inconvenient, but a more serious illness may require adjusting other employees' workloads or hiring temporary staff. This can increase stress on the rest of your team and raise your business's costs. When an employer offers sick pay, you'll likely face a choice between statutory sick pay (SSP) or enhanced sick pay. The former may cause financial hardship for your employee, meaning they return to work before they're fully recovered, while the latter can be expensive, especially if you've had to fund replacement staff in the meantime.

Investing in income protection insurance and critical illness cover can help you support your team in a cost-effective way.

Income protection insurance and critical illness cover provide financial support to employees during illness, but they operate differently. The main difference between income protection insurance and critical illness cover is that one pays an ongoing income while an employee is absent from work, while the other pays a lump sum if they're diagnosed with a serious illness, whether or not they're absent from work.

Let's examine the differences in more detail.

Income protection insurance replaces your employee's usual salary while they're away from work due to illness or injury. Statutory sick pay pays £118.75 per week for up to 28 weeks of absence. This is below the national minimum wage and the living wage, resulting in a significant financial loss for each employee and potentially making it harder to cover basic living expenses.

By contrast, income protection cover provides monthly payments based on a percentage of an employee's usual salary and carries on for a longer period. By investing in an income protection policy, you can provide your team with a financial safety net for the cost of an insurance premium, without having to pay their salary from company funds.

How does group income protection work?

An income protection policy typically pays between 50% and 75% of an employee's regular salary. As an employer, you can take out a group income protection policy that covers all your staff, so they can claim financial support while they're absent.

Policies typically include a deferral period. Income protection payments don't start immediately when an employee becomes ill; if they return to work during the deferral period, they won't receive any payments from the policy. You can choose the deferral period to suit your circumstances. For example, if you offer full pay from company funds during the first part of an absence, you can choose to have income protection payments begin when that period ends. However, you might set a shorter period if employees receive only statutory sick pay. The shortest available period is usually 4 weeks.

You can also set the maximum salary percentage the policy pays out, decide whether the policy covers pension contributions, and specify how long the policy will pay out.

Can income protection insurance cover any other expenses?

Income protection coverage varies depending on your chosen policy and insurer. You can buy cover for employers' expenses, such as National Insurance contributions, pension contributions and the cost of hiring temporary staff to cover sickness absences, as well as covering payments to employees.

Some policies also allow employees to claim a lump-sum payout if they retire early due to illness or are diagnosed with a serious illness.

What are the advantages of investing in income protection insurance?

As an employer, investing in income protection coverage lets you provide your team with cost-effective financial support when they're ill, demonstrating your commitment to their well-being. This can boost employee morale, increase retention and help you attract the best talent. It can also help you mitigate costs your business may incur, such as hiring additional staff. Many income protection policies offer access to health and well-being support services as an optional extra, such as preventative health care or support when returning to work after an absence. Some services, such as employee assistance programmes or rehabilitation, are also available with group health insurance, so it's worth speaking to a broker to discover which option is more cost-effective.

Your support gives employees peace of mind, knowing they can pay their bills and support their families without rushing back to work before they've recovered.

How are income protection payments taxed?

From a business perspective, your monthly income protection premium is an allowable business expense, so you can include it on your tax return and reduce your corporation tax bill.

If an employee buys an individual income protection insurance policy from their net salary, payments are tax-free. However, if your business pays the premium on their behalf, their monthly payments are usually taxable. Most individual policies cap monthly payments at 65% of an employee's normal salary, while group policies pay up to 75% to account for potential income tax reduction.

The main difference between income protection and critical illness cover is that critical illness cover pays a lump sum if an employee is diagnosed with a serious illness listed on the policy. It doesn't pay a regular income, and your employee doesn't have to be absent from work to receive a critical illness payment.

When your employee makes a successful claim on their critical illness policy, they can use the money however they choose. It can help to cover living expenses if needed. Alternatively, if your employee becomes disabled due to illness, they can use it to buy mobility equipment or adapt their home. If their illness is terminal, they can leave the money to their loved ones, pay for funeral expenses or go on a final family holiday, depending on their family's individual circumstances.

How does critical illness insurance work?

With critical illness cover, the policy documents include a list of serious illnesses that the policy covers. Your employee can only claim if they're diagnosed with a named illness. Most policies cover cancer diagnoses, but some only cover certain types or specify that it must have reached a certain stage. You must check the terms and conditions to ensure you understand what's covered. You should also make employees aware that once they've made a claim under the policy, their coverage ends.

Illnesses covered may include:

• Cancer
• Multiple sclerosis
• Parkinson's disease
• Strokes and heart attacks
• Alzheimer's disease

Some may also cover other disabilities caused by illness, such as when treatment requires limb amputation.

Is there more than one type of critical illness insurance?

There are two types of critical illness cover. Level cover provides the same lump sum payout whenever an employee claims. With decreasing cover, the payment decreases the longer an employee has been in the scheme. Decreasing cover is ideal for expenses such as mortgage debt, which decreases as you pay it off, and it's often the cheaper option.

You can decide whether to offer cover to an employee's partner or children, or to give employees the option to add them and pay the premium themselves. Some policies provide a lump-sum payment to support employees who need time off to care for a sick child.

Can you combine critical illness cover with other insurance policies?

You can buy critical illness cover as a standalone policy or combine it with company life insurance. If you're already using a group life insurance policy to provide death-in-service benefits, adding critical illness cover can be more cost-effective than buying a separate policy. Taking professional advice from a broker can help you consider your options and choose the coverage that best meets your needs.

The benefits of providing critical illness cover to your team

The benefits of providing your employees with critical illness cover are broadly similar to those associated with income protection cover. Critical illness cover can provide your staff with financial protection at a stressful time and allows them to use the payout in a way that suits their circumstances. It demonstrates your willingness to support your employees during difficult times and can increase morale, loyalty, and productivity while reducing staff turnover. Premiums for individual policies are typically higher than for group policies, which means your staff may have either put off investing in a policy themselves or reduced their cover to fit their budget. By paying the premium for them, you're providing valuable coverage or enhancing the coverage they already have.

Like income protection coverage, critical illness cover also includes a range of well-being services for members.

How are critical illness payments taxed?

Critical illness premiums are tax-deductible against corporation tax. However, there are tax implications for your employees depending on how you structure the benefit. HMRC treats critical illness cover as a benefit-in-kind, meaning employees must pay income tax on the value of the benefit. Lump-sum payments are typically tax-free, but this may change if the recipient dies before spending the money. In that case, the lump sum would form part of their estate and may be subject to inheritance tax, depending on their estate planning arrangements and the overall value of their assets. It's worth speaking with your accountant and financial adviser to determine the best way to structure the payment.

Income protection and critical illness cover offer distinct forms of financial protection and can work together to provide your employees with a substantial financial safety net when they need it most.

Income protection cover replaces their income when they're off work so that they can take the time they need to recover without worrying about paying the bills. Your business benefits because they won't feel compelled to return too soon and risk further time off or reduced productivity due to not operating at full strength.

Critical illness cover pays a lump sum that can help an employee adjust to a serious illness or life-changing diagnosis, whether they need to take time off work or not. On its own, critical illness cover can help cover living costs, but employees may run short of funds during a long-term absence, particularly if they must also fund home adaptations or other expenses.

Providing both ensures your team members are protected, whatever the circumstances.

Income protection and critical illness cover provide your team with financial support. However, it's worth considering additional policies to support your employees and business during periods of illness and workplace absence.

Health insurance

Health insurance can support your team in two ways. Firstly, it provides quick access to private treatment, helping them get back on their feet and return to work sooner. Quick treatment can mean they avoid worsening symptoms that may occur with the passage of time, along with the mental health conditions that can arise due to a long absence from work.

Secondly, policies include well-being services, health assessments, and other preventive care that can support your staff in developing healthy lifestyles and potentially avoid ill health or reduce their risk levels.

You can invest in group health coverage as part of your employee benefits package.

Key person insurance

While some income protection cover will fund replacement staff, you could also consider key person insurance to cover additional costs if an essential staff member, such as an employee with specialist skills, is absent. These policies typically cover a named person or job role rather than all employees.

At Globacare, we help our clients choose the right protection policies for their needs, helping them support their staff with cost-effective cover. Contact us today for tailored advice.