When you leave permanent employment to become a contractor or company director, you gain commercial freedom but may lose employer sick pay, death-in-service benefits, and other workplace support.
Reviewing your own safety net is important, but the insurance market is full of jargon. A policy may not cover the scenario someone expects if the definition, term, deferred period or exclusions have not been checked carefully.
Understanding the distinct roles of income protection, critical illness cover and life insurance can help you identify overlaps, exclusions and potential gaps before choosing a policy.
Here is a clear, jargon-free comparison of what each policy actually does.
Income Protection: The monthly replacement
What it does: Income protection insurance can provide regular payments if illness or injury prevents you from working, subject to the policy definition and a valid claim [1]. The tax treatment depends on who pays the premiums and the circumstances.
How it pays out: Personal policies commonly insure a portion of gross income, often between 50 and 65 per cent, subject to the insurer’s maximum, deferred period, and payment term [1].
Why it may be relevant to contractors: A musculoskeletal or mental health condition may prevent someone from working even when no specified critical illness definition is met. A valid income protection benefit may help with mortgage, rent and other essential outgoings while the insured person is unable to work.
Key consideration: A longer deferred period, which is the time between stopping work and payments starting, can reduce premiums in some policies. It should be aligned carefully with available savings, company sick pay or other resources rather than assumed to match them exactly.
Critical Illness Cover: The financial shock absorber
What it does: Critical illness cover can pay a one-off lump sum if the insured person meets a specified medical definition in the policy [2]. Tax treatment can depend on policy ownership and individual circumstances.
How it pays out: A claim depends on the precise definition and severity criteria for the covered condition, which may include certain heart attacks, strokes or cancers. It is not generally tied to a set period away from work, but policy terms vary.
Why contractors need it: A serious diagnosis often brings sudden, unexpected costs. You might need to adapt your home, pay for specialist private treatment or simply take a year off to focus entirely on your health without financial pressure.
Key consideration: Policies vary materially in the conditions and severity definitions they cover. A specialist adviser can compare the definitions, exclusions, term and cost rather than considering the premium alone.
Life Insurance: The ultimate family protection
What it does: Life insurance can pay a lump sum or regular payments on death, according to the policy terms and amount of cover selected [3].
How it pays out: It can provide a level or decreasing lump sum under the policy terms. Who receives it, how quickly it can be paid, and any Inheritance Tax implications can depend on policy ownership and whether a suitable trust is used.
Why it may be relevant to contractors: A valid payout may help dependants manage a mortgage, other debts and living costs after the insured person’s death.
Key consideration for directors: If you operate through a limited company, it may be worth asking whether a correctly structured Relevant Life Plan is suitable. The business pays the premiums and, depending on the purpose, structure and circumstances, the premiums may be deductible, the cover is generally not treated as a benefit in kind, and National Insurance may not apply [4]. A suitable trust and professional tax advice are important; treatment is not guaranteed and may change.
Building a blended safety net
One policy does not necessarily replace another. Depending on needs and budget, a review may identify a role for one or more types of cover, or conclude that existing resources already address part of the risk. The appropriate combination depends on circumstances, definitions, exclusions and affordability.
At Broadbench, we specialise in understanding complex contractor and director income. We can review your current circumstances and recommend an approach that reflects your income, business structure, family needs and budget, subject to insurer terms and underwriting.
References
[1] MoneyHelper, What is income protection insurance?
[2] MoneyHelper, What is critical illness cover?
[3] MoneyHelper, What is life insurance?
[4] Royal London, Relevant life plans explained
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