What is the difference between income protection and critical illness cover for self-employed people?

Full answer

Self-employed people have no employer to fall back on for sick pay, making personal protection insurance particularly important, but income protection and critical illness cover serve genuinely different purposes and are often best used together rather than as alternatives to each other. **Income protection -- ongoing replacement income** Income protection insurance pays a regular monthly income, typically 50%-70% of your normal earnings, for as long as you are unable to work due to illness or injury (up to the policy's chosen end date, such as your planned retirement age), after an agreed waiting period (commonly 4, 13, 26 or 52 weeks). It covers a very wide range of conditions -- effectively any illness or injury that prevents you working in your own or a suited occupation, depending on the policy definition -- not just a specific list. Because self-employed people pay their own premiums from taxed income, the monthly benefit received is generally free of Income Tax and National Insurance. **Critical illness cover -- a one-off lump sum for specific serious conditions** Critical illness cover pays a single, tax-free lump sum if you are diagnosed with one of a defined list of serious conditions specified in the policy -- commonly including certain cancers, heart attack, stroke, and a number of other major illnesses, though the exact list, and how strictly each condition must be met to trigger a claim, varies significantly between insurers. It does not pay for illnesses or injuries outside this specific list, however genuinely disabling they may be, and it typically does not pay repeatedly or continue paying income over time -- once the lump sum is paid for a qualifying condition, most policies end (unless it includes specific additional or reinstatement features). **Why self-employed people often need both** Income protection is generally the more important cover for most self-employed people, because it responds to the far more common scenario of being off work for weeks or months due to a wide range of injuries or illnesses that would never qualify under a critical illness policy's specific list (for example, a bad back, a broken leg, or a long recovery from surgery). Critical illness cover complements this by providing a large lump sum for major, life-changing diagnoses -- useful for clearing a mortgage, funding significant home adaptations, or covering a lump-sum cost that ongoing income replacement alone would not address. **Tax treatment is the same principle for both** For both types of cover, when a self-employed person pays the premiums personally from their own after-tax income, the eventual payout (whether an ongoing income protection payment or a critical illness lump sum) is free of Income Tax, Capital Gains Tax and National Insurance. This is because HMRC does not give tax relief on the premiums in the first place, so it would be unfair to tax the benefit again when it is eventually paid out. **Cost and prioritisation** Because critical illness cover pays out for a narrower set of circumstances but as a larger lump sum, it is often more expensive relative to the size of benefit than income protection, which pays more modest amounts but over a potentially much longer period and for a far wider range of triggering conditions. Many self-employed people prioritise income protection first, since it addresses the more common day-to-day risk of being unable to work and earn, adding critical illness cover afterwards if budget allows, particularly if they have a mortgage or dependants who would be seriously affected by a major diagnosis. **Worked example** A self-employed plumber takes out income protection paying 60% of his average profits if he cannot work due to injury or illness of almost any kind, alongside a smaller critical illness policy that would pay a £100,000 tax-free lump sum only if he were diagnosed with one of the specific conditions listed in the policy, such as a heart attack. If he injures his back and cannot work for four months, only the income protection policy pays out, since a back injury of this kind is not on the critical illness list; if he were later diagnosed with a listed cancer, the critical illness policy would pay the £100,000 lump sum in addition to any ongoing income protection payments he might also be receiving for the same period of incapacity.

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