As a limited company owner, your earning potential is dependent on your ability to work.
If you are unable to work due to illness, you won’t earn any income.
This is unlike employees who may receive statutory sick pay or contractual sick pay.
As a contractor, it’s essential to implement your financial safeguards to protect yourself, your loved ones, and your day rate.
Income Protection vs. Critical Illness Cover
Both Critical Illness and Income Protection policies provide financial support if you have an unexpected illness or injury.
However, each policy is unique and offers different benefits, making it crucial to understand the differences between the two.
So, which one suits your business model the best?
Is it the regular income that Income Protection provides until you are well enough to return to work, or the large cash injection into your company that Critical Illness Cover offers?
Most of us never consider that we might ever be seriously ill
Before delving into the intricacies of both Critical Illness and Income Protection, it’s essential to highlight that many contractors believe that they don’t need this type of cover.
They think that they are healthy and fit and won’t need such coverage.
Unfortunately, statistics tell a different story. 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?
Let’s look at some of the key features of each type of protection:
Critical Illness Cover provides a tax-free lump sum payment on 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 only pay once your illness hits a certain level of severity.
In contrast, Income Protection provides a regular wage until you are well enough to resume work again.
As a contractor, self-employed, or a business director, you don’t receive sick pay, making it crucial to have Income Protection.
Income Protection covers any illness or condition that stops you from working, 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 enable a speedy recovery.
The regular wage, usually 50% – 80% of your gross earnings, starts once a ‘deferral period’ has passed. 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.
However, it’s essential to ensure that you have enough funds or employer sickness benefits to cover this period.
The payouts continue until you’re well enough to work again.
You can choose to make your Income Protection plan payout long-term, for example, until retirement, but this will naturally increase your premiums.
Alternatively, you can go for a budget policy, which will cover you for a year or two, and these can be very cheap.
Are the premiums the same?
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 your age, medical history, the type of job you do, and the length of cover required.
With Income Protection, there are additional factors to consider, such as the percentage of income you want to be covered, the length of the deferral period, and whether you want an index-linked policy so that your benefits are protected from the effects of inflation.
It’s important to note that every Income Protection policy has its own definition of incapacity.
Therefore, it’s essential to check your policy documents carefully.
If you choose a policy offering ‘own occupation,’ it pays out if you can’t do the job you hold at the point of making a claim.
Income Protection does not cover the cancellation of contracts, only 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 specializes 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?
Finally, it’s essential to know that insurance companies do pay out on these policies.
A record £6.8 billion was paid out in individual and group life insurance, income protection, and critical illness claims in 2021, with 98% of both individual and group claims being paid.
The main reason for a claim being rejected is non-disclosure. Therefore, it’s crucial to be upfront and honest when applying for any type of insurance.
Some final thoughts
It’s important to consider the differences between the two and choose the policy that suits your needs best.
It’s also important 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 your protection options
We’re worked with leading IFA, Broadbench, for many years at ITContracting.com. They work exclusively with small company owners, and completely understand how contractors work.
Simply fill in the form below to get in touch with Broadbench.