Critical Illness Insurance for company directors – how does it work?

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 add to fears for the future, especially for anyone who has 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 heart attack.

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.

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.

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 in conjunction with critical illness insurance. IP provides you with a monthly income for an agreed period on top of the lump sum.

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 the level of cover decreases over time. This might be until your children leave home or the mortgage is paid off, for example. Or your cover can remain the same over the whole 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.
  • if you already have any underlying conditions.

The sector you work in or the type of work you do can also affect the price of the policy.

Most critical illness policies pay out once. However, some insurers release smaller payments if you are diagnosed with a less severe condition.

The cover will 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 detail.  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 types of cancer are likely to be included. This is because many forms of the disease are now considered to be treatable. Indeed, some providers may only pay out when the disease reaches a certain stage.

This can apply to other conditions such as heart attacks or strokes and the payout will depend on the severity of your condition.

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 or income protection policy. The overall cost is likely to be cheaper.

Critical illness premiums are paid by you as an individual, rather than your company.

Unlike income protection or relevant life insurance, you cannot offset the cost against your company’s tax bill.

However, any claims made on the policy are tax-free.

Your monthly premiums will go up over time, of course, so you need to be sure you can afford to maintain the policy, especially as you get older and the chances of you developing a critical illness increase.

This type of policy has no cash-in value. So if you outlive the duration of the policy as it were, or decide to terminate cover at some stage, you won’t get any money back.

Finally, before deciding on which provider to use, check out the claims data insurers are obliged to publish. This will tell you about their premiums but also reveal the percentage of claims they turn down and why.

Find out more about Critical Illness

We work closely with specialist IFA Broadbench. Simply fill in the form and the friendly team will get right back to you. The team specialises in helping limited company directors, including contractors.

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