Critical Illness Insurance


Why do you need protection?

As a contractor or freelancer you work in a challenging commercial environment and as such are statistically at a very high risk from so called 'Critical illnesses' such as heart attack, stroke and cancer.
Arguably for those contractors without dependents, it could be argued that there is little need for traditional life insurance. As long as sufficient cover is in place to repay any outstanding mortgage or other debt in the event of your death so that no burden is left on any remaining family members, then contractors should maybe think more about 'looking after number one'.

Of far more concern would be the effects of a range of serious conditions such as cancer, heart attack and stroke. These illnesses would often have been killers even 15 years ago but are now treatable thanks to modern medical advances. However these same illnesses (that can incidentally often be traced back to the pressures of contracting) can often leave you in a reduced state of health.

What is the solution?

You can protect yourself from the potentially disastrous financial consequences of such conditions so that a lump sum is paid on diagnosis of the illness.

For a relatively small regular monthly premium a contractor can arrange for a lump sum to be provided simply on diagnosis of the illness - funds that will to help pay for a period of convalescence, pay for changes to home or car to accommodate a reduced state of mobility and go towards maintaining your independence. Without, perhaps, the burden of your mortgage and with money in the bank you can then decide whether you need to get back into the rat race that put you in hospital in the first place.

Income Protection v Critical Illness cover?

Critical Illness cover goes hand in hand with Income Protection/Permanent Health Insurance (PHI) as the latter pays a monthly income in event of illness but which would stop once you were assessed as having made a satisfactory return to health. Unfortunately this early suspension of the payments on a PHI policy means you're forced back to work, perhaps prematurely, without potentially fatal consequences.

The lump sum pay out from a critical illness policy would be yours to keep, regardless of a return to some measure of good health and could maybe allow for some changes to your work pattern etc. Again these changes could be significant enough to help you to avoid a re-occurrence of the illness which is important as a second bout of many of these conditions can prove potentially fatal.

What to look for in a critical illness policy?

When you are considering straightforward life insurance policy, in our capacity as Independent Financial Advisers , we will always look to ensure any premiums are competitive, that the approach of the underwriters is fair so that we can have a good chance of securing you the necessary protection and that the financial strength of the company is good (i.e. will the provider still be around to meet its obligation to you in 10 years time). When advising contractors on critical illness cover we must also take into account very many more issues.

• Medical definitions of what is covered are very important - these must be comprehensive enough to be of practical use to you in the event of a claim.

• The provider must also have a good track record of actually meeting claims- with life cover alone you're either dead or you're alive and so there's no question of that insurer can avoid paying benefits out but with a critical illness the definitions of illnesses that will trigger a payout must be carefully considered!

• Premiums must also remain affordable throughout the term of the policy so that protection can also be maintained as you get older and are even more likely to fall ill.

• Taking these points into consideration may mean that cheapest may not always be best and as Independent Advisers, working for you rather than an insurance company, we will be on hand to guide you.

Types of critical Illness policy

You can cover yourself for a fixed term (i.e. until children grow up /a debt is repaid) or for your entire life (Whole of life - WOL).

You also have the option of a decreasing amount of cover (Decreasing Term Assurance, DTA) that will reduce in line with a reduced liability - i.e. a repayment mortgage or a level amount (Level Term
Assurance, LTA).

Ordinarily these policies will pay a lump sum but if you have reservations about the ability of you or a dependent to cope with a one off payment you may prefer to insure yourself for a set term but have benefit payable annually if you fall ill within the term. In this way it may be easier to for you or a partner to budget. This scheme is known as a Family Income Benefit (FIB).

Taking additional 'waiver of premium' benefit is recommended as it ensures that premiums are maintained by the insurer if you suffer less serious illness that has meant that you are unable to work for 6 months or more. Often the first casualties of a tightening budget brought about by loss of income are insurance premiums and its vital that cover is maintained in such circumstances because it will be more likely that such long term 'minor illness' will ultimately trigger the lump sum payout of a critical illness policy.

Contractor Income Protection (phi)

We have outlined the principles of Permanent Health Insurance below. We can also find the right policy for you.

Whilst permanent employees have invariably have the benefit of at least 3 months pay in the event of accident or sickness, as a contractor you are exposed to financial loss the first morning that you are unable to arrive on site, fit and ready to work. There are ways that you can protect yourself from hardship. You can preserve your current standard of living by setting aside a monthly figure towards permanent health insurance (PHI). These policies will support you financially if you are unable to work and can even maintain your standard of living through to retirement if you suffer a more serious illness or accident.

Benefits are tax free when premiums are paid personally or taxable when paid through your company. If your company pays the premiums they are classed as a legitimate business expense and are without benefit in kind costs to you.

We aim to clear up some of the confusion that surrounds this type of protection, cut through the jargon, advise you of the important questions to ask of providers and help you decide what type of cover is best suited to your situation. For those that already enjoy the protection of this type of cover we provide a check list against which to compare your existing policy to ensure that it is up to scratch.
A provider of PHI (typically an insurance company) will replace a part of your income after a waiting period of your choice. You may come a term used to describe this waiting period - the deferred period. Typically the delay before you are eligible to receive benefits will be between 4 weeks and a year, the longer the deferred period the less this protection will cost to provide. Therefore a one-month waiting period will cost more but will cover you for a relatively minor illness or accident that would mean you could not work in the short term, such as a skiing injury.

If you have savings to pay your bills over this shorter term then you may choose to take a longer deferred period and have benefits starting after 3 or 6 months. Although less serious problems are unlikely to trigger a claim you will be protected against the potentially devastating impact of a longer-term illness or more serious accident.

A suggestion for contractors who are short of funds at the moment is to take a short waiting period initially but extend this term after finances improve and you no longer require such immediate protection.

It is possible to protect up to 75% of your income. Try to be realistic when looking at a figure that you will need. Whilst its fair to say that you may be able to cut back on many areas if necessary, there will be some luxuries that develop a significance far greater if you are ill over an extended period. To retain a car for mobility or perhaps subscribe to cable television could become essentials to your situation if long term illness strikes. You may need to fund help at home and pay for changes to the house to make it more suitable for your condition. Although this is a depressing subject it is one that needs to be fronted. Unfortunately comfort in ill health is often a question of relative financial health and the last thing that you will want holding back your convalescence will be financial worries.

It is vital that the financial advisor/insurance company understands the nature of your income. There are many policies that will pay out solely on salary. Check that dividends are covered, as this is likely to be the route that you have taken a fair proportion of your income to date (*Following IR35, most contractors will no longer receive dividends, so this should no longer be a problem*). Many companies may not be keen to cover against loss of dividends which are often looked at as investment income even though in your case these would soon dry up if you were unable to work. There are a handful of good companies that are happy to cover your income from whatever source you take it. This is an important point to clear up with a potential provider as there is no point in you paying the premium if you will find it difficult to claim.

Whilst deciding which provider to choose it is just as important that the company has a good track record of meeting past claims. Delays in or worst still attempts to limit or avoid payments of benefits in the event of a claim are frustrating and very unfair. The company chosen should be able to provide evidence of previous payments to clients and your adviser should be able to give you feed-back on personal experience of the providers administrative competence. This is one those areas of financial planning that there is far more to picking a provider than cost alone. It is simply not worth trying to save a small amount of money each month by taking cover with a company that will try deter or reduce claims. Unless you can be confident of the provider paying out when you make a claim there is no point in paying at all for cover. Don't just take the companies word for this ask for stats!

Another essential point that is crucial for contractors is that the policy needs to include the definition that you must receive benefit if you are unable to carry out your own occupation. This contrasts to a lesser definition that, if ill the claimant must be unable to carry out any occupation. Bearing in mind your skill level and current income the lesser definition could enable the provider to insist that whilst you were indeed ill, you could still work as a shelf stacker or some other menial job and therefore refuse to pay your claim. This is an area that is often overlooked and could be used as a means of making a quote seem more reasonably priced. You are skilled technicians and cover needs to reflect this.
Looking at the potential impact of you never being able to return to work, you should always ensure that policies should cover you to your chosen retirement date for instance age 60 or 65. You must look carefully at the date that your pension is expected to pay out (remember the state 'old age pension' will not begin until 65 for men and now also 65 for most women contractors) and you may suffer penalties for taking some of your existing pensions early.

Particularly important in the event of a longer-term claim is the impact of the cost of living on your chosen income level. It is essential to inflation proof your benefit. £2000 per month will have a fraction of the spending power in 10 years time as it has today. It is possible to maintain the value of your benefits by ensuring that the amount insured increases by a set amount each year (often known as indexation or escalation). Options could be by 3%, 5% or the government Retail Price Index (RPI). Be realistic when agreeing this figure with an advisor or the company- it is important that the figure is high enough to be of value to you in the future if you were claiming.

Who pays the premium-me or my company? It is possible to pay for the cover personally from your net income in which case benefits in payment are tax free. Alternatively you can fund executive PHI from the company account in which case benefits enter the company tax free but then you pay tax and national insurance on any salary that he/she draws the income out as. Whilst the premium is a business expense in the same way as sellotape or pension payments are and you will pay no benefit in kind for this policy, the real reason for funding your PHI this way will be to ensure that executive pension premiums can be maintained even in ill health. Because you cannot apply a waiver of premium (the 'payment protector' that you can apply to a personal pension so that investment is still made, even if not earning because of illness) an executive pension would have to be suspended after prolonged illness. This is because personally funded PHI is not classed as taxable earnings for pension purposes. However executive PHI pays into your company, salary and therefore pension can be maintained and retirement income is funded. Obviously you will have the choice whether to fund the pension or not and will have to weigh up the impact of your illness on your life expectancy but there are many crippling and not life threatening illness' that you could survive through to lengthy retirement. It would be tragic to be comfortable financially in illness during working age only to be impoverished in retirement due to lack of funded pension.

Contractor Life Cover Insurance

You are likely to have had the benefit of 'death in service benefit' of up to 4 times salary in your last permanent job. Many employees don't ever realise the value of this unseen perk of salaried employment but now that you sought the greater potential rewards offered by contracting you have also left the security of a big company benefits package and may need to arrange your own protection for your partner, kids or other family members. You may also use your enhanced income as a contractor to buy your first, an additional or a larger property. Again this will need to be covered by life insurance so that no debt is left for your family should anything happen to you.

Use our 'life cover decision aid' to work out which type of policy is right for you and then fill in one of our Protection Finder. As IFAs we are able to trawl the entire market for this type of cover and once we have carried out our research we will email back with a recommendation as to competitive provider for your age group and requirements. Thankfully the insurers are engaged in a fiercely competitive battle to get your custom and we should be able help you get that safety net at a price you can afford. Why not also check that any existing cover that you have is still competitive. If you have had a policy arranged in the past 5 years then we can almost certainly reduce the costs now and if have ever taken cover through a bank or building society then we can often save you up to 40% of the premiums for identical cover.

There are 2 main types of life insurance 'term cover' and 'whole of life'.

A term policy will, as the name suggests, provide simple low cost protection for a given period after which time the policy will lapse without value. Rates can be very competitive and will be influenced by your age on taking out the cover, whether you smoke and whether you are male or female (guys are supposedly more likely to do stupid things in cars etc and are likely to be marginally more costly to insure).

With a whole of life plan you know that the insurer will be paying out at some time although this cover is likely to be more expensive. You will die at some stage and (as long as you have kept the policy going) the insurer will have to pay -even if you are 90 years old!

As you will see from the finder there are various types of life cover with varying applications. Below are common uses of the various plans

Uses of level term assurance

1. Provide a lump sum for those close to you to place on deposit and draw off the interest to make up for your lost income. Its important to realise that this capital could be easily eaten into so reducing the income generated (see family income benefit for alternative/mix and match this with)

2. Cover your life for the time that your kids will be dependent on you (say to age 18 or perhaps 21 if you hope they will go to University).

3. Protect an interest only loan such as an ISA mortgage so that you leave no debts for your family to pay.

Uses of a decreasing term assurance

To cover a repayment (capital and interest) mortgage.

Uses of a family income benefit plan
To provide a set income over a term to help fund household bills/education. Remember that the total benefit that this plan pays may be relatively small if death occurs in ,say the last year of a 20 year policy but could be very significant if death occurs early in the term. A level policy will pay the sum if death occurs in the first month or the last month of the same 20 year term.
Uses of a whole of life policy

Useful if there is a need to ensure that cover never comes to an end. Can be reasonably priced if taken out early and is often backed by an investment element that builds up over time to help keep costs under control later in life. If this investment linked plan is encashed at an earlier stage than when the fund has been depleted to help meet premiums then a cash sum can be drawn out (sometimes referred to as cash if you die, cash if you don't die policy) whereas the plans mentioned above very rarely feature any investment element and will not build up a savings element to be paid out on stopping the policy.

As independent advisers we are pleased to confirm that we can make recommendations from providers from across the whole market. We are happy to point out that we can work on a commission or fee basis and that any initial discussions will be free of charge.