Although most articles on our site cover the benefits of contracting and the highs and lows of being a contractor, we inevitably address the more depressing aspects of running a contracting business in our insurance-related topics.

Unlike permanent employees, many of whom have varying levels of financial protection through their employers, contractors must ensure they are protected if they are unable to work.

Some of the most serious conditions, such as heart attack, stroke and cancer, are referred to as ‘critical illnesses’ by the financial services industry.

Clearly, should you be afflicted by any of these conditions, there could be serious financial consequences for you and your family if you do not have adequate insurance cover in place.

What is critical illness cover?

Critical illness policies pay out a lump sum upon diagnosis of a covered condition, which would be used to cover a variety of needs – such as paying off a mortgage, settling debts, or paying for medical costs.

Unlike other types of policy, you receive the income upon diagnosis rather than death, so you can use the funds to improve your lifestyle and pay the bills while you recover.

You will be covered for a list of potential conditions. Clearly, the more conditions you are covered for, the higher the premiums will be.

Unlike income protection and relevant life insurance, you will have to pay for critical illness cover out of your post-tax income. However, if you make a successful claim on your policy, the payment will be tax-free.

Benefits of Critical Illness Cover

Critical illness policies pay out a lump sum upon diagnosis of a covered condition, which would be used to cover a variety of needs – such as paying off a mortgage, settling debts, or paying for medical costs.

Unlike other types of policy, you receive the income upon diagnosis rather than death, so you can use the funds to improve your lifestyle and pay the bills while you recover.

You will be covered for a list of potential conditions. Clearly, the more conditions you are covered for, the higher the premiums will be.

Unlike income protection and relevant life insurance, you will have to pay for critical illness cover out of your post-tax income. However, if you make a successful claim on your policy, the payment will be tax-free.

How does it work?

This type of insurance is often used in conjunction with Income Protection, which will provide you with a monthly income while you remain unable to work.

For contractors, critical illness cover is often used alongside income protection.

While income protection replaces lost earnings over time, critical illness cover provides an immediate lump sum to reduce financial pressure at a critical moment. You can compare the two policy types here.

With a Critical illness policy, you will receive a single lump sum upon diagnosis, which does not need to be returned, even if you return to perfect health.

You can tailor your policy to cover you for a fixed term (e.g. until retirement), or for ‘whole of life’. The same terms apply to Life Cover policies.

You can also choose to use Decreasing Term Assurance (DTA), or Level Term Assurance (LTA) – the former provides a decreasing amount of cover over time, whereas the latter provides a level of cover that remains the same.

You will find that the average premiums for this type of policy are significantly higher than those for life insurance.

Our partner, Broadbench, explains: “The reason is that statistically, you are two-and-a-half times more likely to suffer a critical illness than you are to die before the age of 65.”

Things to consider when choosing a critical illness policy

Here are some general pointers to help you choose the right policy for your specific needs:

• Are you a smoker? If you are a smoker, your premiums will be much higher than those of a non-smoker. Aside from the obvious health benefits you would gain, you could almost halve your policy premium costs if you quit.
• Flexibility: ideally, you will be able to change the amount of cover you require over time.
• Type of payout: think about the type of benefit you would like to receive if you make a claim – a lump sum, or an annual payment.
• Policy definitions: ensure you understand exactly what conditions are covered and how they are defined within the policy terms.