Life as a limited company owner can be very rewarding, but it can also be pretty stressful.
One aspect that business owners and contractors often worry about is being diagnosed with a serious illness. This could force you away from work for a lengthy spell.
The financial consequences of this can be potentially disastrous. This can heighten fears about the future, especially for anyone with dependants.
This is where taking out critical illness insurance can help, as the policy pays out a lump sum if something serious happens to you, such as being diagnosed with cancer, having a stroke or having a heart attack – provided the condition meets the definition set out in your policy.
In this guide, we look at what you can expect from critical illness insurance and what to look out for before buying a policy.
Benefits of critical illness insurance for directors and contractors
Unlike life insurance, which pays out if you die while covered by the policy, critical illness insurance pays out a tax-free lump sum if you are diagnosed with a serious illness covered by the policy.
For instance, if you take out a 30-year policy with £100,000 worth of cover and have a brain haemorrhage within that period, you’ll receive the full amount in a single payment – provided the diagnosis meets the policy’s definition for a full claim.
This can be a financial lifeline. Especially if your illness means you may not be able to work again for a long time, if at all.
The money is yours to use as you like. Typical uses include:
- Help to pay off any major debts, such as a mortgage.
- Paying for specialist treatment.
- The ability to invest for you and your dependants in the future.
Hopefully, you do make a full recovery and return to work in some capacity if that’s what you want.
Either way, you won’t have to pay any of the money back.
Income protection is often taken out alongside critical illness insurance. Income protection provides a regular income if illness or injury prevents you from working, subject to the terms of the policy.
The two types of cover serve different purposes. Critical illness insurance pays a lump sum for specified conditions, whereas income protection can potentially pay out for a much wider range of illnesses and injuries which leave you unable to work.
How it works
You can decide how long you want critical illness cover in place, for a fixed term such as 25 years or until you retire.
You can tailor the cover so that the level of cover decreases over time.
This might be until your children leave home or the mortgage is paid off, for example. Alternatively, your cover can remain the same for the entire term.
Your premiums are based on the likelihood of you making a claim, and factors taken into account include:
- your age.
- if you are a smoker.
- your medical history and any existing conditions.
- the amount and term of cover you require.
Your occupation and other lifestyle factors can also affect the cost or terms of cover in some cases.
Most critical illness policies pay out once following a successful full claim. However, some insurers make smaller payments if you are diagnosed with certain less severe conditions.
Depending on the policy, the remaining cover may then continue and you may be able to make another claim if you develop a critical illness later.
List of conditions
As with any type of insurance, the devil is in the details. Always read the terms and conditions of any policy offer before signing on the dotted line.
Make sure you understand exactly what is and what isn’t covered and check for any exclusions.
For instance, not all cancer types are likely to be included. Some providers may only pay out when the disease reaches a certain stage or meets a particular definition.
This can apply to other conditions, such as heart attacks or strokes, and whether a claim is paid will depend on the medical definition and severity criteria set out in the policy.
It’s also important to answer the insurer’s medical and lifestyle questions accurately when you apply. Incorrect or incomplete information can affect a future claim.
What else to consider
Shop around to see what’s available.
Ask your existing insurer for a quote. Critical illness may be an option you can add to your life insurance policy, and combining cover may work out cheaper than buying separate policies.
For most directors taking out ordinary personal critical illness cover, premiums are paid personally from post-tax income.
This is different from Relevant Life Insurance, which can be arranged and paid for by a limited company where the relevant conditions are met.
A company can also take out critical illness cover for a different purpose – for example, key person insurance designed to protect the business financially if an important director or employee becomes critically ill. The ownership, purpose and tax treatment of this type of policy are different from personal critical illness cover.
HMRC has specific rules governing the tax treatment of key person insurance premiums and proceeds, so it’s worth taking professional advice if your company is considering this type of cover.
A payout from a personal critical illness policy is normally tax-free.
When comparing policies, check whether the premiums are guaranteed or reviewable. Guaranteed premiums are fixed at the outset and don’t increase simply because you get older, while reviewable premiums can be changed by the insurer at specified points during the policy.
This type of policy has no cash-in value. If you outlive the policy term or decide to terminate cover at any stage, you won’t receive any money back.
Finally, before deciding on which provider to use, check out the claims data published by insurers.
This can show the percentage of critical illness claims they pay and decline, and insurers may also explain the main reasons why claims aren’t paid.
Find out more about Critical Illness
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