Contractors rarely have the employee benefits which come with a permanent job. If you cannot work for an extended period because of a serious illness, there may be no company sick pay or employer-funded insurance to fall back on.
Critical illness insurance pays a lump sum if you are diagnosed with one of the serious medical conditions covered by your policy. These normally include certain cancers, heart attacks and strokes, although the conditions and definitions vary between insurers.
The money you receive from a claim can be used in any way you want – to reduce your mortgage or other debts while you recover.
What does critical illness insurance cover?
A policy does not pay out simply because you become too ill to work. Your condition must be listed in the policy and meet the insurer’s definition, including any test relating to its severity.
Under the Association of British Insurers’ minimum standards, a product described as critical illness insurance must cover cancer, heart attack and stroke. Insurers commonly cover many other conditions as well, such as kidney failure, Parkinson’s disease and major organ transplant.
The headline number of illnesses can be misleading. Two policies may both list cancer, for example, but use different definitions or offer different payments for an early-stage diagnosis. Some policies pay a smaller amount for specified less severe conditions without ending the main policy.
Our separate guide looks more closely at the illnesses covered and how policy definitions work.
Why contractors may need critical illness cover
If you have an enforced break from contracting – particularly if you run a one-person company and are the family’s main earner – the effect on your household income can be immediate and profound.
A lump sum gives you options. It could remove a large monthly commitment by paying down the mortgage, provide money for treatment or changes to your home, or simply buy time while you recover.
This matters when much of the household income depends on one contractor. It may also matter when a spouse or partner would need to take time away from work to provide care.
It is worth checking what protection you already have before buying anything. Savings, a partner’s income, an existing policy and any benefits retained from other employment all affect the amount of cover you may need.
Critical illness cover or income protection?
These policies deal with different risks. Critical illness cover is triggered by a qualifying diagnosis. Income protection is based on your inability to work under the terms of the policy.
| Critical illness cover | Income protection | |
|---|---|---|
| Payment | One-off lump sum | Regular payments |
| Trigger | A listed condition which meets the policy definition | Illness or injury which prevents you from working, as defined by the policy |
| Main use | Mortgage, debts and other large costs | Replacing part of lost earnings |
| Length of claim | Normally one claim, after which the cover ends | Payments can continue for the policy’s agreed claim period |
You could be unable to work with a condition which is not covered by critical illness insurance. Back problems and many mental health conditions are obvious examples. Equally, you could receive a critical illness payout and later return to contracting.
For this reason, some contractors hold both types of cover. See our fuller comparison of critical illness and income protection.
Can your limited company pay for critical illness cover?
For an ordinary personal critical illness policy, the premiums are normally paid from your own post-tax income. It should not be confused with relevant life insurance, which can provide tax-efficient company-funded life cover for a director or employee but cannot include critical illness cover.
A company can take out key person insurance covering the critical illness of a director or employee. This is a different arrangement: the company owns the policy and receives any payout to compensate the business for the loss of that person’s services.
HMRC states that the premiums may be tax-deductible where the sole purpose of the policy is to cover a loss of trading income. However, relief can be harder to justify where the person insured is also a major shareholder, as the policy may partly protect the value of their shares rather than solely serving a trading purpose.
The precise treatment depends on the policy and why it was taken out, so seek professional tax advice before arranging company-owned cover.
Read more here: HMRC’s guidance on insurance for employees and key people.
How much cover might you need?
There is no catch-all cover figure which will suit contracting in general – the amount of cover you need depends purely on your individual needs (and current liabilities).
Typically, you should first consider your largest outgoings – often a mortgage, and then factor in the likely ongoing household spending and medical costs you need to cover whilst you recuperate. From this figure, deduct any existing savings you have and insurance policies you already have in place.
This does not mean that everyone needs enough cover to clear the mortgage in full. A smaller policy which reduces your essential monthly costs may be more affordable and still make a substantial difference.
What affects the premium?
The price is based on both the cover selected and the likelihood of you making a claim (according to insurers’ risk algorithms).
Insurers will generally consider:
- your age;
- whether you smoke or have smoked;
- your health and family medical history;
- your occupation;
- the amount and length of cover; and
- whether the policy provides level or decreasing cover.
Level cover keeps the insured amount unchanged. Decreasing cover reduces it over time and is often arranged alongside a repayment mortgage. Critical illness cover can also be bought on its own or combined with life insurance.
Do not assume that the policy with the longest list of conditions represents the best value. The definitions, exclusions and level of payment matter more than a large headline number.
Checks to make before buying
Read the policy wording and ask the adviser or insurer to explain anything which is unclear. In particular, check:
- the conditions covered and the medical definitions used;
- whether less severe conditions qualify for a partial payment;
- any exclusions arising from your health or family history;
- whether the premiums are guaranteed or can be reviewed;
- whether the cover is level or decreases over time;
- what happens to the policy after a claim; and
- whether children’s cover or other support services are included.
Answer medical and lifestyle questions fully and honestly when you apply, as you could have problems later on if you make a claim and previously provided inaccurate (or incomplete) information.
Critical illness policies do pay substantial sums to policyholders. ABI figures for 2025 show that insurers paid £1.25 billion in individual critical illness claims, with an average payout of £67,000. Cancer accounted for 65% of claims paid.
The amount and type of cover you need will always depend on your personal circumstances. If you speak to an adviser, always make sure you pick one who understands the nuances of contracting, and working via a limited company.