Income protection vs critical illness cover for company directors
If you run a limited company, income protection and critical illness cover are very different types of policy, although both protect you and your family in different scenarios.
Executive income protection is commonly arranged and funded through the company, while critical illness cover is more often paid for personally, rather than by the company.
They also protect against different financial risks: one is designed to replace earnings if you’re unable to work, while the other provides a one-off lump sum if you’ve received a specified diagnosis.
For many company directors, executive income protection forms the core of longer-term income protection planning because it can replace lost earnings on an ongoing basis if illness or injury prevents you from working.
How income protection works
Income protection pays a regular monthly benefit if you’re unable to work because of illness or injury.
Payments continue until you recover, your chosen benefit period ends, or you reach retirement age.
For directors, this is usually set up as executive income protection, where the company owns the policy and pays the premiums. Cover can typically insure up to around 80% of your combined salary and dividends, subject to insurer limits. Premiums are often treated as a business expense and may reduce your Corporation Tax bill.
Income protection is designed to replace earnings over time while you are unable to work. You can choose short-term or long-term cover depending on how long you want payments to continue.
Unlike critical illness cover, income protection is based on incapacity rather than diagnosis alone.
This means a policy may pay where a medical condition prevents you from carrying out your role, even if the condition is not listed under a critical illness policy.
How critical illness cover works
Critical illness cover pays a single lump sum if you are diagnosed with a condition defined in the policy. Common examples include cancer, heart attack and stroke, although the exact list varies by insurer.
For directors, this type of cover is usually arranged personally rather than through the company.
The payment is made once and can be used for any purpose, such as repaying debt or covering major expenses. After a successful claim, the policy normally ends.
Unlike income protection, it does not provide an ongoing income. It is generally better suited to covering larger one-off financial commitments rather than replacing regular earnings over a long period.
The Association of British Insurers (ABI) provides further detail on how critical illness cover is structured.
Key differences
| Feature | Income protection | Critical illness cover |
|---|---|---|
| Typical structure for directors | Usually company-paid executive cover | Usually personally owned |
| Type of payout | Monthly benefit | Single lump sum |
| Main purpose | Replace ongoing earnings | Cover major financial costs |
| Claim trigger | Unable to work due to illness or injury | Specified medical diagnosis |
| Duration | Potentially until retirement | One-off payment |
- Type of payout: Income protection provides a monthly benefit while you are unable to work. Critical illness cover pays a single lump sum.
- Structure: Income protection for directors is typically company-paid. Critical illness cover is usually personally funded.
- Trigger for payment: Income protection pays where a medical condition prevents you from carrying out your role, subject to the policy definition. Critical illness cover only pays if a specified condition is diagnosed.
- Duration: Income protection can pay for an extended period, potentially until retirement. Critical illness cover pays once and then ends.
- Tax treatment: Critical illness payouts are usually tax-free. Executive income protection claims are normally paid to the company and treated as taxable business income.
- Purpose: Income protection replaces lost earnings over time. Critical illness cover is typically used for larger, one-off costs.
Some company directors use both types of cover, but for different purposes. Critical illness cover can provide an immediate lump sum following a serious diagnosis, while income protection can continue replacing earnings if you remain unable to work for a longer period.
If you are unsure how to structure cover, it is worth discussing the options with a regulated financial adviser.
They can take into account how you are paid — whether through salary, dividends or a combination — and how existing sick pay arrangements affect your position.