As a limited company owner, your earning potential depends entirely on your ability to work.
Unlike traditional employees, who receive SSP or contractual sick pay, you won’t get paid if you’re unable to do your contract work due to injury or sickness.
If you’re a contractor, it’s essential to put in place a financial safety net to protect you and your family.
Income Protection vs. Critical Illness Cover
Two popular types of financial protection which many contractors take out are Income Protection and Critical Illness Cover.
Both policies will provide financial help if you’re unable to work, but they cover different scenarios and provide different benefits.
Which one is right for you?
Is it the regular income that Income Protection can provide until you are well enough to return to work, or a large cash injection into your company that Critical Illness Cover offers?
Most of us never consider that we might ever be seriously ill
Before looking into the intricacies of both Critical Illness and Income Protection, it is human nature to assume you’re healthy and fit and would never need this type of cover.
Unfortunately, this understandable outlook isn’t backed up by statistics.
Approximately one in five men and one in six women will suffer a long-term illness in their lifetime.
Shockingly, the average age for critical illness claims in the UK is only 47 years old.
This is why it’s crucial to consider both Income Protection and Critical Illness Cover and give yourself the same protections as your PAYE counterparts.
You’ll have peace of mind that, should you become ill or injured, money won’t be a concern, and you can focus all of your energy on getting better.
What’s the difference between Critical Illness Cover and Income Protection?
In this section, we examine the differences between each type of policy.
- Income Protection: pays a regular monthly income if you’re unable to work due to illness or injury.
- Critical Illness Cover: pays a one-off lump sum if you’re diagnosed with a specified serious illness.
Critical Illness
Critical Illness Cover provides a tax-free lump-sum payment upon the diagnosis of a specified illness.
This payout can be used for anything, such as medical treatment, mortgage payments, or home modifications.
It is essential to note that Critical Illness policies don’t cover all illnesses, and they won’t pay out if you die.
To make a successful claim, your condition must be included on your insurer’s list of definitions of serious illnesses.
These definitions vary by insurer, and in some cases, the insurer may pay only after your illness reaches a certain level of severity.
Income Protection
In contrast, Income Protection provides a regular wage until you are well enough to resume work again.
As a limited company director or sole trader, you don’t receive sick pay, making it crucial to have Income Protection.
Income Protection covers any illness or condition that means you can’t work, including mental health conditions and musculoskeletal problems.
It can also cover more serious illnesses like cancer or heart disease.
Many insurers also offer free services, such as counselling and rehabilitation support, to help you recover.
The regular income provided, which is usually between 50% – 80% of your gross earnings, begins at the end of your ‘deferral period’.
The longer the deferral period, the lower the monthly premiums.
You can choose a deferral period that suits your needs, usually from a week to 24 months.
But if you choose a long deferral period, you need enough funds already in place to cover you until the policy pays out.
The payouts continue until you’re well enough to work again.
You can choose how long the policy pays out for:
- Long-term (for example, until retirement)
- Short-term (for example, one or two years, which can be cheaper)
Are the premium costs similar?
Critical Illness and Income Protection premiums are hard to compare because they provide very different types of cover.
However, Critical Illness Cover tends to be a little more expensive than Income Protection.
Both policy types take into account factors such as:
- Your age
- Your medical history
- The type of job you do
- The length of cover required
There are a few extra things to think about with Income Protection, such as how much of your income you want to cover, the length of the deferral period, and whether you want the policy to increase with inflation.
It’s important to note that every Income Protection policy has its own definition of incapacity, so check your policy documentation carefully.
If you choose a policy which offers ‘own occupation,’ it pays out if you can’t do the job you hold at the time of the claim.
Income Protection does not cover loss of contract work (i.e. a non-renewal or a termination). It only covers the inability to work due to illness.
When deciding which policy is right for you, consider factors such as your mortgage debt and how long you would need financial support.
If you have a large mortgage debt that you wouldn’t be able to pay without your income, Critical Illness Cover could be a good option for you.
The payout can be used to cover the mortgage or anything else you choose.
Income Protection policies are more likely to pay out than Critical Illness Cover because you don’t have to develop a specified illness to qualify for a payout; you just need to be unable to work because of an accident or illness.
This is where talking to a financial adviser who specialises in the contractor sector adds the most value.
A good adviser will get to know your individual circumstances and recommend the right policy and level of cover required to adequately protect what matters to you.
They can also help you understand the tax implications of the policies.
It’s worth noting that both policy types generally exclude illnesses arising from alcohol and drugs, pregnancy, and pre-existing conditions.
Some providers may agree to cover certain pre-existing conditions, and this would be assessed on a case-by-case basis and reflected in the premium.
Do insurers actually pay out?
It’s reassuring to note that the vast majority of claims made on these policies are successful.
A record £8 billion was paid out in individual and group life insurance, income protection, and critical illness claims in 2024, with almost 98% of both individual and group claims being paid.
The main reason for a claim being rejected is non-disclosure, so you need to be upfront and open when applying for any type of insurance.
It’s also essential to work with a financial adviser who specialises in the contractor sector to ensure that you have the right policy and level of cover required to adequately protect what matters to you.
Find out more about Income Protection / Critical Illness
Use this form to get in touch with our Broadbench, our IFA partner, to discuss your options or to get some policy quotes.
They’re contractor specialists with excellent customer service.
Hundreds of our visitors have used their services over the past five years.