Life and critical illness cover for contractors

Life insurance pays a lump sum if you die during the policy term; critical illness cover pays a lump sum if you're diagnosed with a specified serious condition and survive it. Both are usually arranged around the mortgage — enough to clear it, so your family keeps the home. For company directors, relevant life cover can allow the company to pay the premiums, which is often more efficient than paying personally.

What do these two policies actually do?

Answer first: life insurance pays a lump sum if you die during the policy term. Critical illness cover pays a lump sum if you’re diagnosed with a specified serious condition and meet the policy’s definition — you’re alive to receive it.

They cover different events, which is why they’re often taken together (and are frequently offered on a single policy). For a contractor with a mortgage, both point at the same worry from different angles: what happens to the home and the people in it if something happens to you.

How much cover should you take?

The natural starting point is the outstanding mortgage. Cover sized to clear the loan means, in the worst case, your family keeps the home without a mortgage payment they may have no way to meet — especially relevant when the household income was largely your day rate.

From there, people often add cover for other debts, the cost of raising children, or replacing lost income for a period so the family isn’t forced into immediate decisions. There’s no universal number: it depends on your commitments and who depends on you. A sensible test is to ask what would need to be paid for, and for how long, if your income vanished tomorrow.

Decreasing or level term?

Decreasing term cover reduces over time, roughly tracking the falling balance of a repayment mortgage. Because the insurer’s exposure shrinks, it’s usually cheaper — and it fits neatly if the whole point is to clear a repayment mortgage.

Level term keeps the sum assured flat for the whole term. That suits an interest-only mortgage, where the balance doesn’t fall, or where you want to leave your family more than just a cleared mortgage.

Neither is “better” in the abstract — the right one follows from your mortgage type and what you want the money to do. It’s worth deciding this deliberately rather than accepting whichever a comparison site shows first.

The thing to understand about critical illness cover

Critical illness policies pay for conditions on the insurer’s list, where the diagnosis meets the policy’s stated definition. That’s a real constraint and it’s where most misunderstanding lives: the policy doesn’t pay simply because you’re seriously unwell — it pays if the condition is listed and the definition is met.

Lists and definitions vary between insurers, sometimes materially. So the comparison isn’t just about price: two policies at similar premiums can differ in what they’d actually pay for. This is an area where the wording deserves genuine attention, and where advice earns its keep.

It’s also why critical illness cover is not a substitute for income protection. A serious back injury that stops you working for a year is unlikely to be a listed critical illness — but it stops your invoices just the same. The two products cover different risks; many contractors need both.

The director’s option: relevant life cover

If you contract through a limited company, there’s a route employees don’t have. A relevant life policy is a form of life cover the company takes out on a director or employee — meaning the company pays the premium rather than you paying from money you’ve already extracted.

For many directors this is more efficient than personal cover, which is why it’s worth raising before defaulting to a personal policy. Our guide on relevant life versus personal life cover sets out the comparison. As with anything blending tax and insurance, take it alongside your accountant’s view rather than in isolation.

When should you arrange it?

Ideally alongside the mortgage, not as an afterthought. There are two practical reasons. First, the mortgage is usually what determines how much cover you need, so the two decisions naturally belong together. Second, cover generally costs less the younger and healthier you are, and putting it off rarely makes it cheaper.

Arranging it with an adviser who already understands how your contract income works also means the cover is sized against your real earnings rather than whatever figure a generic form extracts from you.

The bottom line

Life cover pays out if you die; critical illness pays a lump sum on diagnosis of a listed condition. Most contractors size both around the mortgage, so the family keeps the home. Choose decreasing or level term to match your mortgage type, read the critical illness definitions rather than just the price, and — if you’re a director — compare relevant life cover before paying personally. To arrange protection around your mortgage, speak to an adviser.

This article is general information, not personal advice. Policy terms, exclusions and definitions vary between insurers, and cover must be suitable for your own circumstances.