Unlike traditional employees, contractors don’t receive workplace benefits such as employer pensions, sick pay, or private health cover. This means if something goes wrong, you are financially exposed unless you arrange your own protection.
The good news is that a wide range of tax-efficient products is available to contractors. These policies can help safeguard your income, provide for your family, and keep your business running if you’re unable to work.
Below we outline the main types of protection available to limited company contractors, with links to more detailed guides.
Protection options compared
Here’s how the main protection options compare side by side.
| Type of cover | What it provides | Who it protects | When it pays out | Tax treatment |
|---|---|---|---|---|
| Income protection | Monthly income | You | After illness or injury prevents you from working (deferred period applies) | Tax treatment differs if the policy is owned personally vs via company |
| Critical illness | One-off lump sum | You / family | On diagnosis of a listed serious medical condition | Personal payouts are usually tax-free |
| Relevant life insurance | Lump sum on death | Family / beneficiaries | On death or terminal illness while policy is in force | Paid by company, no BIK, typically IHT-efficient via trust |
| Key person (keyman) | Lump sum | Your business | If a key director or employee dies or becomes critically ill | Premiums/payouts treated as business-related, varies by policy/accounting |
| Private health insurance | Access to private medical treatment | You / family | When medical treatment is required | If paid by company, premiums are a taxable benefit |
Summary only. Policies and tax treatment vary by provider and personal circumstances.
Income protection
If you fall ill and cannot work for an extended period, there is no employer safety net. An income protection policy provides a regular monthly income after a short waiting period, helping you cover living costs until you are fit to return.
Premiums depend on the level of cover you need and the length of the deferred period before payments start. Policies can be taken out personally or via your company, which affects how payouts are taxed.
Read more in our guide to income protection for contractors.
Critical illness cover
Critical illness insurance pays a one-off lump sum if you are diagnosed with a serious condition covered by the policy. The payout can be used to repay debts, cover medical costs, or support your household while you recover.
Many contractors take out critical illness cover in addition to income protection, as the two policies work in different ways.
See our critical illness cover guide.
Income protection vs critical illness
Confused about the difference? Our comparison explains how the two policies work and which might be more suitable depending on your circumstances. Read the comparison here.
Relevant life insurance
Relevant life cover is a tax-efficient way for limited company contractors to provide life insurance for themselves and their families. The policy is paid for by your company, with no benefit-in-kind or income tax implications.
The policy is written into a discretionary trust, so any payout is usually free from Inheritance Tax. It can also be transferred if you close your company or move into permanent employment.
Find out more in our guide to relevant life insurance for contractors.
Key person (keyman) insurance
If your company relies heavily on one or two individuals, losing them due to illness or death could cause serious financial problems. Key person insurance pays a lump sum to the business in these circumstances, helping to cover costs while you find a replacement or stabilise operations.
Read more in our keyman insurance guide.
Private health insurance
Many permanent employees receive medical cover through their employer. Contractors don’t. Private medical insurance (PMI) provides access to faster treatment and private facilities, reducing downtime if you’re unwell.
See our guide to private medical insurance for contractors.
Final thoughts
Insurance and protection policies aren’t compulsory, but they can be vital for contractors who have no employer to fall back on.
Before choosing any product, consider how long you could support yourself if you were unable to work, and what financial commitments you need to protect.
Always compare providers carefully, and if you are unsure, seek advice from an FCA-regulated adviser. You can check whether a firm or individual is authorised to give financial advice by searching the FCA Register.