Critical illness insurance for contractors

Critical illness insurance is a type of policy designed to cover you if you happen to be diagnosed with a serious medical condition. It’s a policy aimed specifically at the self-employed such as contractors, sole traders, and directors of small limited companies.

One of the many advantages of being self-employed is the independence this provides; one of the drawbacks, however, is that being solely responsible for running a successful business can prove to be pretty stressful.

Working long hours, meeting tight deadlines and going the extra mile for clients can all take a toll on your health even leading to a lifestyle-related illness over time. As with all types of insurance, critical illness is predicated on a ‘what-if’ scenario. In this case, it’s how would you or your dependents manage financially if you were struck down with a serious condition and unable to work? This is where critical illness insurance comes in.

Different from life insurance

Critical illness insurance is not the same as life cover. With critical illness, you receive a lump sum if you are diagnosed with one of the illnesses or conditions covered by the policy. Life insurance pays a single lump sum if you die during the term of the policy. It is likely you’ll be offered critical illness cover as an add-on whenever you take out a life insurance or an income protection policy, and it may work out cheaper to do so.

Single, tax-free payout

Most critical illness cover pays a single, tax-free sum if you are diagnosed with one of the serious conditions listed (see below) in the policy. If you suffer a stroke, for instance, and have £150,000 critical illness cover in place, you’ll receive that amount in a lump sum. This could prove to be a financial lifeline and the money is yours to spend as you see fit. You could use the money to pay off existing company debts, clear an overdraft, settle medical bills or invest some in a fund to provide an income.

As stated above, most insurers pay out a single lump sum, although some offer to pay a smaller amount if you are diagnosed with a less severe condition, after which the policy continues as before. You may also be offered children’s critical illness cover as an incentive and at no extra cost to your policy, although the lump sum payment will be significantly less.

What is covered by critical illness?

Typically, this type of policy will cover between 50-60 illnesses and conditions such as cancer, coronary heart disease, stroke and multiple sclerosis. However, it’s important to know what is and isn’t covered. For example, as many forms of cancer are now treatable, you may not be able to make a claim until the disease reaches a certain stage. It’s the duty of the insurer to state clearly what exclusions apply to the policy, but it’s your responsibility to make sure you understand them. Insurers are also obliged to publish details about their record on claims, so always check to see what percentage of claims have been honoured and how many have been refused.

How much does it cost?

The cost of your policy will depend on a number of factors such as the amount you want to be insured for, your age at the time of applying and your own medical history. The more likely you are to make a claim, the higher the premium will be. An older applicant can expect to pay a higher premium, for instance; the same applies if you’re a smoker. It’s also important to note that there is no cash-in value with this type of policy. In other words, you won’t receive a payment if you survive to the end of the policy term or decide to terminate the policy early. You should also make sure you can afford to meet the monthly payments for the full term of the policy.

Always provide accurate information

Finally, when you apply for critical illness cover you’ll be asked about your medical history. Please provide accurate and up-to-date information, as insurers can refuse to pay out on any future claim if they discover you’ve withheld some relevant information about your health.

Find out more about Critical Illness cover

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    About the Editor

    • James Leckie

      James is an experienced business and finance writer. He studied economics and worked for large companies including British Airways, Citi and JP Morgan before working as a data analyst IT contractor in the late 1990s and 2000s. He founded Contract Eye in 2006 and also writes widely for a number of popular business sites. Connect with James on LinkedIn.

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    Last updated: 2nd March 2022