Running your own small business can be very rewarding but it can also be pretty stressful. One aspect that contractors often worry about is being diagnosed with a serious illness and having to be off work for a lengthy spell.
The financial consequences of this can be potentially disastrous, adding to fears for the future, especially for anyone who has dependents.
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 article, 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
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, to help pay off any major debts such as a mortgage, pay for specialist treatment or be invested for you and your dependents in 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, also known as permanent health insurance (PHI), is often taken in conjunction with critical illness cover as this gives you 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, until your children leave home or the mortgage is paid off, for example, or remains 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, whether you’re a smoker and if you already have an underlying condition.
The sector you work in or the type of work you do can also affect the price of the policy.
Most critical illness policies are designed to pay out once only although some insurers may pay out smaller payment 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 and you should 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 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 as critical illness cover may be an option you can add to your life insurance or PHI policy and work out cheaper.
You may decide to pay for this type of cover personally, or via your limited company (an executive plan). There are, unsuprisingly, tax implications to consider, which you should discuss with an IFA.
In any case, not all providers offer standalone cover for critical illness. Your monthly premiums will go up, 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 increases.
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.