Income protection vs critical illness cover for company directors
Income protection and critical illness cover do different jobs.
Income protection provides a regular income if illness or injury leaves you unable to work. Critical illness cover pays a lump sum if you’re diagnosed with one of the medical conditions covered by the policy.
For limited company directors, there’s another difference. Income protection can be arranged through the company as executive income protection, whereas critical illness cover is more commonly taken out personally.
How income protection works
Income protection pays a monthly benefit if you’re unable to work because of illness or injury.
How long payments can continue depends on the policy. Short-term cover may pay for one, two or five years, while long-term cover can potentially pay until you recover or reach the policy end age.
For a limited company director, cover can be arranged as executive income protection. The company owns the policy, pays the premiums and receives the benefit if a claim is accepted.
Salary and dividends may both be included when calculating the amount of cover available, depending on the insurer.
Company-paid premiums may also qualify as an allowable business expense for Corporation Tax purposes. See our guide to executive income protection tax for more on this.
The important point is that a claim is based on your ability to work, rather than simply being diagnosed with a particular illness.
A condition doesn’t have to appear on a list of specified illnesses. What matters is whether it prevents you from working under the definition used by the policy.
See our comparison of short-term and long-term income protection for more on how long benefits can be paid.
How critical illness cover works
Critical illness cover works differently. It pays a lump sum if you’re diagnosed with one of the conditions specified in the policy and meet its definition.
Cancer, heart attack and stroke are commonly covered, but the conditions and definitions vary between policies.
The money is paid as a lump sum rather than a monthly income and can be used however you choose. You might use it to reduce a mortgage or other debts, pay for changes to your home or simply give yourself a larger financial reserve.
A successful claim will normally bring the cover to an end.
You don’t necessarily have to be unable to work to make a critical illness claim. The claim depends on meeting the medical definition in the policy.
The Association of British Insurers (ABI) has more information on how critical illness insurance works.
Income protection vs critical illness cover
| Feature | Income protection | Critical illness cover |
|---|---|---|
| Type of payment | Regular monthly benefit | One-off lump sum |
| Claim based on | Your ability to work | A specified medical diagnosis |
| How long can it pay? | From a fixed benefit period to potentially the policy end age | Single payment |
| Typical arrangement for directors | Can be arranged and paid for by the limited company | More commonly personally owned |
| Main use | Replacing some of your lost earnings | Providing a lump sum following a serious diagnosis |
Could one policy pay when the other doesn’t?
Yes.
You could develop an illness that leaves you unable to do your job but doesn’t meet the definition of any condition covered by your critical illness policy. Income protection may still pay if you meet its definition of incapacity.
The reverse is also possible. You could meet the definition for a critical illness claim but remain capable of working. In that situation, the critical illness policy may pay while there is no income protection claim.
The two policies have different claim triggers, which is why having one doesn’t necessarily make the other redundant.
Which provides better protection if you can’t work?
If the main concern is how you’d pay yourself during a long period away from work, income protection is designed specifically for that purpose.
A critical illness lump sum can provide a substantial amount of money, but it isn’t intended to replace your earnings month after month.
This becomes more important with a lengthy absence. A director unable to work for several years could lose a significant amount of salary and dividend income during that time.
Long-term income protection may continue paying throughout that period, subject to the terms of the policy.
What about shorter periods off work?
Income protection doesn’t normally start paying immediately. The deferred period determines how long you need to be unable to work before payments begin.
You might choose four, eight, 13 or more weeks depending on the policy and how long you could manage using company reserves, savings or other income.
Critical illness cover doesn’t use a deferred period in the same way. A claim is based on satisfying the medical definition and other conditions in the policy.
If your company could continue paying you for a while, a longer deferred period may reduce the cost of income protection.
Our guide to income protection vs sick pay looks at how existing provision can affect the amount of cover you need.
Can you have both?
Yes. The two types of insurance can sit alongside each other because they cover different risks.
Critical illness cover could provide a lump sum following a qualifying diagnosis, while income protection could provide monthly payments if the same illness left you unable to work.
Whether you need both depends on the cover you already have, your savings, debts and how dependent you are on your earnings.
Which should a company director choose?
Start with what you want the insurance to cover.
If losing your monthly income is the main concern, look closely at income protection. Check how much of your salary and dividends can be insured, the deferred period and how long a claim could continue.
If you’re more concerned about having a lump sum available after a serious diagnosis, critical illness cover addresses that risk differently.
It’s not necessarily a choice between one or the other. Some directors use income protection for ongoing earnings and critical illness cover for larger one-off financial costs.
A specialist IFA can compare the cover available and how the different policies would fit alongside any protection you already have.