Income Protection vs Life Insurance: What's the difference?
There’s a wide variety of insurance policies, all designed to help support you or your family financially. And it can be easy to confuse which type of policy does what.
Here we take a look at life insurance and income protection insurance. We explore the key differences between the two and how each policy works. We also consider if life insurance or income protection is best or if it’s a good idea to consider both types of insurance.
By the end of this guide, you’ll understand the difference between the two types of cover. So, you can decide for yourself which insurance is right for your family.
What is life insurance and income protection?
Life insurance gives your loved ones a cash lump sum when you pass away or if you’re diagnosed with a terminal illness. They can use the money for anything, like paying off a mortgage and funeral costs.
There are two basic types of life insurance. Term life insurance and whole of life insurance. There are also life insurance products packaged for specific needs. Such as, mortgage protection or over 50s life insurance. However, they all pay out a lump sum on death.
Income protection is designed to pay out while you’re still alive. It’s an insurance that pays a monthly amount to replace some of your income if you become ill or get injured and can no longer work. It helps to meet your living expenses, such as rent or mortgage payments, and utility bills.
How does income protection work?
Income protection insurance provides a replacement tax-free monthly income if you can’t work because of illness or injury. The illness or injury you have will need to meet the criteria set out by the insurance company.
Most income protection policies cover injuries such as back pain and broken bones. And they’ll also cover you for mental health conditions such as anxiety, stress and depression. Illnesses covered include cancer, heart disease and stroke.
When you have a successful claim, you’ll receive a monthly payment until you return to work, retire, die, or the policy ends – whichever comes first.
Some insurers, like Vitality, also support you to get back to work. You'll get access to a network of physiotherapists and mental health counsellors. For people recovering from cancer, we provide a 12-week health optimisation programme.
When you set up your claim you can choose to defer taking payments for a few months. This will usually make the cost of your cover cheaper. Then, when you make a claim your payments will start after this deferred period. The overall cost of your cover depends on things like:
- Your age
- The type of job you do
- How long you want cover in place
- Your current health and lifestyle
- Your chosen deferred period.
How does life insurance work?
Life insurance gives your loved ones a cash lump sum when you pass away or if you’re diagnosed with a terminal illness. They can use the money for anything, like paying off a mortgage and funeral costs.
There are two basic types of life insurance. Term life insurance and whole of life insurance.
Term life insurance covers you for a chosen number of years, which is called the ‘term’ of the policy.
If you die within your chosen time frame, say 25 years, then your beneficiaries will receive a cash lump sum. If you die after the 25 years have expired, then they won’t receive anything.
Term life insurance is often used to provide a payout if you die whilst you have a mortgage. The amount of the payout can help pay off the loan.
Whole of life insurance covers you for the rest of your life. Unlike term insurance which has an expiry date, whole of life insurance covers you until you die, as long as you keep paying your premiums.
When you die, the payout goes to your beneficiaries. This type of insurance is often used to help pay an inheritance tax bill, so the cost doesn’t need to come out of your estate.
The cost of your life insurance will depend on:
- Your age,
- Your chosen payout,
- How long you want the policy in place,
- Whether or not you’ve ever smoked,
- Your health and lifestyle.
Differences between life insurance and income protection
Comparing life insurance vs income protection insurance.
| Income protection insurance | Life insurance | |
|---|---|---|
| What it does | Provides a monthly tax-free payout to replace your lost income. | Pays out a lump sum if you die or are diagnosed with a terminal illness while the plan is in place. |
| Purpose | To help you pay for day-to-day expenses, such as your rent or mortgage, food and fuel bills. | To provide financial security to loved ones when you die. |
| Types of cover | Usually taken out for a fixed length of time whilst you're working. Payouts can be level or linked to inflation. | Can be taken out for a fixed amount of time or for the whole of your life. |
| Length of plan | You can choose how many years you want the plan in place for. | You can choose how many years you want the plan in place for. Whole of life insurance will last for the rest of your life. |
| Premiums | Usually paid monthly. You can choose whether you want your premiums to stay the same or be reviewed every few years. Premiums will increase if you've chosen to link your payout to inflation. | Usually paid monthly. Once bought, the price of the cover stays the same. |
| Payout | Up to 60% of your annual earned income. You can choose a level income where the amount stays the same. Or you can choose to increase the payout in line with inflation. The payout will be paid to you or into a joint account. | This will be the amount you chose when you took out your policy, unless you have decreasing term insurance where the payout reduces each year. You can choose who you want to receive the payout from your life insurance. |
Do you need life and income protection insurance?
Both products are designed to help you financially when you need it most. They can both be used to replace your salary.
However, life insurance only pays out if you die or are diagnosed with a terminal illness. If you get sick or are injured and can’t earn your normal wage, then income protection can bridge the gap before you go back to work. But income protection insurance won’t pay off your mortgage if you die and your family lose your income completely. So, there’s a place for both types of insurance.
You should consider life insurance if you have debts, such as a mortgage or loans. Unfortunately, debts don't disappear when you die, so your estate will need to pay them back. This means there’s less for your loved ones which could cause financial worry.
If you’re self-employed, without an employer who may pay sick pay, you may want to consider taking out income protection insurance. Similarly, if you have dependants or you're the main wage earner, you may benefit from taking out income protection.
Key takeaways
- Life insurance gives your loved ones a cash lump sum when you pass away or if you’re diagnosed with a terminal illness. They can use the money for anything, like paying off a mortgage and funeral costs.
- Income protection provides a replacement tax-free monthly income if you can’t work because of illness or injury. The illness or injury you have will need to meet the criteria set out by the insurance company.
- Both insurance products are there to help you and your family financially. One pays out a lump sum on death, the other a monthly income whilst you’re still alive. So, they fulfil separate needs but can be bought together.
- What’s right for you will depend on your circumstances. Types of cover will vary between providers, so it’s best to speak to an adviser before you buy income protection insurance.
Vitality life insurance
Want to know more about life insurance or thinking about taking out a policy? Here are some of the benefits of taking out life insurance with Vitality:
- A brand you can trust - In 2024, we paid out 98.9% of all Life Cover claims.*
- Get a lower monthly premium upfront when you add Optimiser to your plan. Keep your premiums low when you stay active.
- Access to Vitality partner discounts and rewards.
- Get free no-obligation advice. Our advisers offer expert advice to help you make the right decisions.
You're not alone in choosing Vitality. Over 2 million lives in the UK are now covered by our insurance, and we’re here to support you too.
Ready to take the next step? Getting a quote is simple and takes just a few minutes.
*VitalityLife Claims and Shared Value Report 2025
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Pays out to your loved ones if you die or become terminally ill.
