August 2020

Critical illness vs income protection insurance

Posted on 27 August 202030 March 2025 by Sophie Soraf

Recent events have acted as a stark reminder about the importance of protecting ourselves financially – the pandemic has made us all aware that illness can strike at any time and of the devastating impact this can have on ourselves and our families.

Here we explain the ins and outs of critical illness cover and income protection insurance, the difference between the two, and which type of cover might work best for you.

What is critical illness cover?

Critical illness cover is a long-term insurance policy that pays out a tax-free lump sum if you develop a serious illness, which must usually be permanent or terminal. To receive a payout, your condition must be specifically listed as a critical illness within your policy wording.

Examples of specified critical illnesses include (but are by no means limited to):

Heart attack
Stroke
Certain cancers/stages of cancers
Alzheimer’s disease
Multiple sclerosis

The payout you receive can help you pay your rent or mortgage, bills, and any adaptations you might need to make to your home to accommodate your illness or disability.

What is income protection insurance?

Income protection insurance is designed to provide you with a monthly income if you are unable to work due to illness or injury. It will pay out a percentage of your usual monthly income until you can return to work, allowing you to recover without the stress of a significantly reduced income.

This type of cover usually features a waiting period, with payments designed to commence once you’re no longer covered by sick pay or other insurance policies. You can keep your premiums low by making the waiting period longer, and vice versa. You can also usually claim multiple times within the policy term for different injuries or illnesses.

While income protection covers a wider range of illnesses, insurers use a ‘definition of incapacity’ to determine the eligibility of a claim. The two most common definitions are:

Suited Occupation – if you are off work due to illness or disability, your insurer will assess your skills and capabilities and decide whether you could conceivably perform another job to which you are ‘suited’.
Own Occupation – your insurer will assess your ability to perform the duties and responsibilities of your current role.

What is the difference between critical illness and income protection insurance?

There are a number of differences between the two types of protections:

Critical illness cover pays out a single lump-sum, while income protection insurance pays out a monthly allowance (normally a set percentage of your usual monthly income) until you are well enough to return to work or you retire.
Critical illness cover will only pay out if you are diagnosed with a specific serious illness that is listed within your policy wording. On the other hand, you can claim on your income protection insurance for most illnesses or injuries that leave you unable to work.
While you can claim multiple times on an income protection policy, a critical illness policy is designed to provide a one-off payout.

Which cover would suit me best – income protection or critical illness insurance?

Choosing which cover is right for you will depend on a number of factors including whether you’re looking for a lump sum payment or a regular payout of a percentage of your monthly salary, the level of flexibility offered by the policy, and of course, cost.

Lump sum payment

Many people feel more comfortable at the thought of a lump sum payout, so if you’re one of them, then critical illness cover could be best for you. It also allows you to choose the level of cover you want, although of course covering yourself for a bigger lump sum will inevitably increase your premiums.

But it’s important to remember that you’re not entitled to multiple payouts. As soon as your insurer has paid out on a claim, your policy will come to an end. What’s more, if or when the money runs out (which may be sooner than you think if you’re using it to pay for equipment, adaptations to your home, carers, etc. that may be required following your illness), no further support will be forthcoming.

Regular payout

Income protection insurance pays out a percentage of your regular income, providing ongoing cover for any illness or injury that prevents you from working. The disadvantage here is that your monthly payouts are limited to what you’re currently earning; if you’re on a low income, your payouts will be accordingly low.

However, the policy is designed to cover you until you return to work, or until you retire. If you never return to work due to your illness or disability, income protection could actually pay out more in the long term than a lump sum critical illness policy.

Flexibility

In some ways, critical illness cover isn’t as flexible as income protection, as it only covers a scheduled list of illnesses. In comparison, income protection is there to cover you against most illnesses that prevent you from working, so it could be argued that income protection insurance is more flexible and there is less chance that your insurer will refuse to pay out on your claim.

Critical illness cover on the other hand, has the advantage of paying out straight away, whereas you’ll have a waiting period before any payout starts with an income protection policy. This may be unsuitable if you have little or no savings to fall back on if your income were to stop suddenly. So, if losing your income would leave you financially fragile within months, it may be best to take out a critical illness policy.

Cost

Your monthly premiums will typically be lower if you opt for income protection insurance, despite the total potential payout often being higher (i.e. it would pay out more in the long term if you never recovered sufficiently to return to work).

This is because the likelihood of the insurer having to pay out the full amount is much less than with a critical illness policy (where the policyholder is certain to receive a full payout if they meet the policy criteria), as most people who are unable to work are usually able to return after a period of recovery.

Would critical illness or income protection insurance cover me for COVID-19 ?

It’s unlikely that a critical illness policy would cover you if you contract Coronavirus, for several reasons. Firstly, as a new illness, it’s unlikely to be listed as a specific illness within your policy. Secondly, Coronavirus is a mild illness for the majority of people – so is unlikely to be categorised as a critical illness – in most circumstances anyway.

However, if you were to go on to develop another serious condition as a result of contracting COVID-19, which is listed within your policy (e.g. kidney, liver, heart or respiratory failure), then yes, you would be covered.

Income protection insurance is likely to pay out if you were out of work long-term due to Coronavirus symptoms or complications. However, if you were self-isolating, you would be unlikely to be covered unless your isolation has been advised by a medical professional. Furthermore, the waiting period means that you would usually have come out of self-isolation by the time any payout could be made.

If your Coronavirus symptoms were to continue beyond the waiting period, then your claim may be accepted by your insurer, subject to individual policy terms and conditions.

This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice. Some information quoted was obtained from external sources we consider to be reliable.

Tees is a trading name of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered number 211314. Tees Financial Limited is registered in England and Wales. Registered number 4342506.

Resolving high-income divorce challenges and future income concerns

Posted on 13 August 202023 March 2025 by Sarah O'Sullivan

The division of assets is one of the main issues to resolve during divorce proceedings. For people with very high incomes and substantial assets, and their spouses, being able to reach a fair financial settlement is, understandably, a key concern, given the number of potentially complicating factors and levels of income that need to be taken into account.

Decisions as to what happens to future income is often where there is most difficulty in reaching an agreement in a divorce settlement involving a high-earning spouse. This is particularly so where complex reward structures are involved that are not fully understood by one if not both spouses.

Failure to fully take into account incentive and performance reward packages can have significant implications on the outcome of a divorce settlement and risk restricting either party’s choices in the future, so you must seek specialist legal advice.

Incentive payments and performance payments not yet realised

There may be circumstances where there are financial resources in place through incentive and performance reward packages which originated during the marriage, although they are not immediately available at the time of the divorce settlement.

Such financial resources may well be shared in a divorce to achieve fairness between the earning and non-earning spouse.

Incentive and performance reward packages are aimed at attracting and retaining the best talent and are likely to be nuanced from firm to firm and industry to industry. However, enhanced remuneration structures do tend to follow certain themes, such as:

Share options (or stock options)

Share option schemes are typically used as an incentive for employees. A share option is the right to buy a certain number of company shares at a fixed price at some point in the future. Share option schemes often come with tax incentives.

There are different share option schemes you may come across such as Company Share Option Plans, Enterprise Management Incentives, Nil-Cost and Nominal Costs Options, Share (Stock) Appreciation Rights, Sharesave Share Option Schemes and ‘Phantom’ Options.

Long-term incentive plans

A long-term incentive plan (LTIP) is a term that is commonly used among listed companies to describe executive share plans under which a company makes share-based awards to senior employees with a vesting period of at least three years. Such structures are also often called ‘performance shares’ or, in the US, ‘restricted stock units’.

Again there are often tax efficiencies to these schemes. LTIPs are not restricted to rewards in shares; cash also features in these reward structures.

Management incentive plans

A management incentive plan (MIP) most often refers to a scheme where the equity is allocated to senior management in a privately owned business. The company is likely to be owned by a private equity house and the equity would vest with the senior management in the event the private equity house sells its share the business or the company is floated on the stock market.

Performance bonuses

A form of additional compensation paid to an employee or department as a reward for achieving specific goals or hitting predetermined targets. A performance bonus is compensation beyond normal wages and is typically awarded after a performance appraisal and analysis of projects completed and/or financial targets met by the employee over a specific period.

Sharing of payments – what to consider?

There is a distinction to be made between those sums payable under such incentive or performance schemes which realise a value in the future with no further input from the earning spouse and those which require further endeavour after the marriage is over to realise their maximum potential.

This will affect how the income derived from such sources will be treated in a divorce settlement.

The timing of payments will also be a consideration. A performance bonus might be shared if it is awarded close in time to the end of the marriage, however, it is less likely to be shared if awarded well after the relationship is over.

As a general rule, it is possible to share in the benefits of such schemes even following divorce, however, consideration will be given to the value or opportunity which arose during the marriage against any extra input required by the earning individual to realise an enhanced value at a later date and whether this can be justified by reference to needs.

Future maintenance provisions

It is not always the case that in divorce, one party must pay the other an amount out of their income in the future. There has been a general movement away from maintenance being “for life,” with courts preferring to award maintenance as a shorter-term stepping stone to help the non-earning spouse transition into financial independence. In some circumstances, long-term maintenance can be required as part of a fair outcome in a divorce.

There are two classes of maintenance – child maintenance and spousal maintenance. The two combined are often referred to as global maintenance. Where spousal maintenance features, a settlement or court order tends to be based on two principles:

what each party might need to live on in the future;
whether it is appropriate for each party to share in future financial resources.

It should be stated that future earnings or earning capacity, whilst relevant, is unlikely to be considered a matrimonial asset to be shared and so ongoing maintenance must be linked to a demonstrable income ‘need’ rather than a sense of entitlement or sharing.

Complex arrangements require specialist advice

The issue of the future value of income in divorce proceedings is complicated for both the earning and non-earning spouses, and specialist advice should be sought as soon as possible.

At Tees, our expert legal advisers work to ensure a fair financial settlement so that future needs can be met according to the financial resources available. We also work closely with financial advisers in our Wealth Management team where needed. They will ensure that any future financial planning considerations are taken into account so you both have a clear view of your financial future.

Directors’ pension: maximise business profit and provide for your future

Posted on 3 August 202030 March 2025 by Sophie Soraf

You’ve invested years as well as considerable time and effort building up your business. So, the question now is: how do you extract the profits in the most tax-efficient way? The simple answer is, pension contributions.

If you have a limited company, contributing to a pension can bring significant tax advantages. Pension contributions can be treated as an allowable business expense and offset against your company’s corporation tax bill.

Whilst Business Asset Disposal Relief (BADR) Relief offers an attractive tax benefit to individuals (subject to certain criteria) and is available on business sales at 10% up to a value of £1m, it’s worth remembering that this money has already been subject to Corporation Tax and so the net proceeds are reduced and can take a considerable slice of your hard-earned profit.

What are the tax benefits?

If you run your own business, you can make personal contributions to a pension or you can make contributions through your company, with both options bringing significant tax advantages. For Company Directors, there are numerous benefits of doing so in terms of tax and control:

Company Directors have a range of sophisticated options available to them, over and above those offered by a default Auto Enrolment employee scheme
Contributions for Directors can be made by the Company as an Employer Contribution
Company Directors have the ability to control the timing and amount of contributions
Pension contributions are deductible against Corporation Tax

Attractive schemes for directors

The pension schemes available to Company Directors are attractive in that they are able to hold a much wider range of assets than workplace and personal pensions.

These arrangements can invest in shares listed on any HMRC recognised stock exchange; investment funds such as unit trusts and open-ended investment companies (OEICs) deposit accounts with any UK authorised financial institution as well as commercial property including land.

Pensions for Company Directors can be arranged on either a personal or group basis.

What is a SIPP?

A Self-Invested Personal Pension (SIPP) offers more control to you as a Director and a wider investment universe than workplace pensions or Personal Pension Plans.

When paying into a SIPP from a limited company, you could make employer pension contributions directly from your company. Your limited company SIPP pension contributions can come from pre-taxed income so by paying money directly into your pension, rather than paying in from your salary, you could gain greater tax efficiencies.

If you are a higher or additional rate taxpayer, you can pay money straight into your pension via salary exchange, instead of declaring the income as profit and taking it out as a dividend.

Benefits of a Small Self-Administered Scheme (SSAS)

For some businesses with specific needs it may be that a Small Self-Administered Scheme (SSAS) is more appropriate. These arrangements offer a “pooled” approach for up to 11 members meaning that as a Director of an SME you can combine resources to purchase commercial property whilst retaining your own ear-marked fund.

Both SIPPs and SSASs benefit from the ability to be able to borrow up to 50% of the net assets of the scheme, which is another useful feature when considering commercial property investments.

Further benefits to saving in a pension

Savings inside a pension receive considerable tax incentives:

no capital gains tax on growth
no tax on income received and
pensions aren’t subject to Inheritance Tax

You may never pay tax on any of the funds invested within your pension.

Also worth considering is that employers don’t have to pay National Insurance on pension contributions. The National Insurance rate for 2023/24 is 13.8%, so by contributing directly into your pension rather than paying the equivalent in salary, you save up to 13.8%.

This means that in total, your company can save up to 38.8% by paying money directly into your pension rather than paying money in the form of a salary. Depending on your circumstances, this may or may not be more beneficial to you than paying personal pension contributions.

Bringing your premises into your pension scheme

A popular and tax efficient solution is for the pension scheme to purchase the property your business operates from. In this case all the tax benefits described above continue to apply whilst the employer pays rent to the pension scheme, thereby making further savings against Corporation Tax.

Add to this the investment flexibility that a director’s pension can provide and in certain circumstances the ability to make commercial loans back to the company, directors’ pensions can double up as a very useful business planning tool.

Is there a limit on contributions?

The amount that can be contributed to a pension and receive tax relief is £60,000 per annum. Once the current year’s allowance has been used, any unused allowance from the previous three years can be brought forward.

Safe and secure

Pensions are held in trust so it is not normally possible for creditors to make a claim against your pension scheme unless it can be demonstrated that the funds were invested with the intention of avoiding a claim. Provided your contributions have been regular and made for the purpose of providing retirement benefits, your pension fund is safe and secure for your benefit regardless of what happens to your business.

Important things to remember

Saving for your future is in important part of financial planning, and it should be done as tax-efficiently as possible
As a business owner there are many schemes available to you with attractive features you can benefit from that are not available within a normal employee pension scheme
Pension contributions are one of the most tax efficient ways of doing this whether it be contributions paid by the business which qualify for corporation tax relief, or personal contributions which qualify for tax relief at your highest marginal rate
You can access your pension from the age of 55 and there are a number of different and flexible options available, including drawdown

As Independent Financial Advisers with access to the whole of the market, Tees Wealth is perfectly positioned to recommend you the most suitable arrangements according to your business needs and individual circumstances. If you would like an informal chat at no cost or obligation, please don’t hesitate to get in touch.

This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Past performance is not a reliable indicator of future returns and all investments involve risks. Some information quoted was obtained from external sources we consider to be reliable.