As a business owner, professional, contractor or freelancer, being unable to work means you can’t earn.

It’s a sobering thought. While staff at a company enjoy statutory or contract-based sick pay from their employer, independent professionals like you must take steps to protect themselves, their loved ones and their day rate. In this post, we’ll look at the available insurance for contractors, freelancers and company directors, exploring their differences, unique benefits and what to look out for. 

Imagine The Consequences

What would happen if you couldn’t work for several months? Could you afford to keep up with your household bills or mortgage payments? What about those who rely on your income? Injuries or illnesses that require extended periods out of work may also come with the cost of medical treatment, medication or, in extreme cases, modifications to your home. Do you have enough in reserve to cover that?

But you eat well and hit the gym a lot. It probably won’t happen to you, right? 

Unfortunately, the statistics tell a different story. Approximately 1 in 5 men and 1 in 6 women will suffer a long-term illness in their lifetime. It’s also shocking to note that the average age for critical illness claims in the UK is only 47 years old. Add to that the fact that up to 40% of the UK’s small to mid-sized businesses may be underinsured, and it becomes a perfect storm of problems for independent professionals.

With these stats and the financial impact of a serious illness or injury in mind, Critical Illness and Income Protection Insurance for contractors aren’t just nice-to-haves but essential investments. Organising protection not only provides ongoing peace of mind but ensures you’re not worrying about money when your focus should be on getting better.

But which is right for you?

What’s the difference between Critical Illness Cover and Income Protection?

Critical Illness and Income Protection policies do similar jobs but in different ways. Both provide financial support in the case of an unexpected illness or injury, and neither impose any restrictions as to what the money can be used for. The key differences are that Income Protection provides you with a monthly wage until you’re well enough to return to work, while Critical Illness cover pays out a large lump sum to help keep you and your business going. 

The two diverge further when you consider that Income Protection covers any illness or condition that stops you from working, while a Critical Illness payout is based solely on the diagnosis of a condition or illness that’s listed on your policy.

Critical Illness Insurance for Contractors 

Critical Illness Cover pays you a tax-free single lump sum if you’re diagnosed with a specified illness. The illnesses covered are usually long-term and very serious conditions such as a heart attack or stroke, loss of limbs or diseases like cancer, multiple sclerosis or Parkinson’s disease. Different providers offer differing levels of coverage, but a good rule of thumb is that the more conditions the policy covers, the more it costs per month. For this reason, it’s always worthwhile discussing this type of policy with a whole-of-market financial adviser that specialises in the contractor sector. 

The large, one-off payment provided by Critical Illness Cover is tax-free and can be used for anything you wish. Claimants often use the lump sum to pay their mortgage and regular bills but may also put it toward medical costs or installing accessibility features in their homes. 

Unlike Income Protection, there’s no deferral period, and a claim can be made on diagnosis. However, depending on the specifics of your policy, you may need to survive for at least 10 to 30 days after your diagnosis before the policy will pay out. Once the policy has paid out, it ends.

Income Protection Insurance for Contractors 

As a contractor, self-employed professional or business director, you don’t receive sick pay, which is why it’s so important to have Income Protection. The cover will provide you with a regular wage until you are well enough to resume work again. Income Protection covers you for any illness or injury that stops you from working and earning, providing you’ve been signed off by a doctor. This could be anything from broken bones or back pain to mental health conditions like depression, stress or anxiety. These common conditions aren’t usually covered by Critical Illness insurance. However, Income Protection does cover more serious illnesses like heart disease, cancer or strokes. Many insurers also offer free services such as counselling and rehabilitation support to enable a speedy recovery.

Should you need it, the regular wage provided by Income Protection Insurance (usually somewhere between 50 and 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, but make sure you have enough funds or employer sickness benefits to cover this period.  Once up and running, the payouts continue until you’re well enough to work again. You can elect to make your Income Protection plan pay out over a longer period (until retirement), but this will naturally increase your premiums. Alternatively, you could choose a much cheaper policy that will cover you for a year or two.

The tax implications of Income Protection cover depend on how you choose to pay the policy premiums. The payouts are tax-free if paid from your own pocket, but if you pay them through your business, they are tax deductible, and you will be taxed if you make a claim. That’s why it makes sense to discuss your options with a contractor specialist financial adviser.

Are Critical Illness and Income Protection 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. 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 such as the percentage of income you want to be covered, the length of the deferral period and if you want an index-linked policy so your benefits are protected from the effects of inflation.

Insurance features to look out for

Every Income Protection policy has its own definition of ‘incapacity’, so check your documents carefully. If you choose a policy offering ‘own occupation’, it does what it says on the tin and 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. It’s important to know that Critical Illness policies don’t cover all illnesses and 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 vary by insurer, and in some cases, the insurer may only pay once your illness hits a certain level of severity, so it’s always advisable to speak to a financial adviser to ensure you choose the right policy.

Both policy types generally exclude illnesses arising from alcohol and drugs, pregnancy and pre-existing conditions. That said, some providers will agree to cover certain pre-existing conditions, but this would be assessed on a case-by-case basis and would be reflected in the premium.

Which policy is right for me?

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, in fact, 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 could be for nearly any reason, from back problems to stress, and 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.

Do insurance companies pay out?

A record £6.8 billion was paid out in individual and group life insurance, income protection and critical illness claims in 2021, according to the latest figures from the Association of British Insurers (ABI) and Group Risk Development (GRiD). Furthermore, 98% of both individual and group claims were paid in the same year. The main reason behind a personal protection claim being rejected was ‘non-disclosure’. This is when a customer doesn’t tell their insurer something at the outset that might have affected the insurer’s decision to provide cover and the price of that cover. In summary, both policy types can be used to safeguard yourself, your family, and your day rate and are worth considering.

Ready to protect what matters?

Now you know a little more about the insurance available to you and which is right for your needs, it’s worth doing your research into the different providers and assessing your options carefully. Naturally, we recommend enlisting the help of an experienced provider to guide you through this process. Our experts will not only get to know you and your circumstances to determine the right level of cover but find policies specific to contractors that aren’t available to just anyone. We’ll even do all the paperwork for you. 

If you’ve been putting off sorting out insurance or need specific guidance, we’re ready and waiting to help. Find out more here.

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