A common worry people have when considering critical illness insurance is do you pay tax on the payouts? Understanding how payouts are treated is essential because it helps you plan ahead and make the most of your policy if you ever need to claim.
In this blog, we explain how critical illness payouts are taxed in the UK, why the lump sum is usually tax-free, and how this type of policy can provide financial stability for you and your family.
What is critical illness cover?
Critical illness cover is a type of insurance that pays out a tax-free lump sum if you are diagnosed with one of the serious medical conditions listed in your policy. Conditions commonly covered include:
- Cancer
- Stroke
- Heart attack
- Multiple sclerosis
- Major organ transplant
The payout is designed to help you manage the financial impact of a serious illness, such as replacing lost income, paying off your mortgage, or paying for any additions to your home that you may need to assist with your recovery.
Do you pay tax on a critical illness payout?
In most cases, no tax is payable on critical illness payouts in the UK. The money is considered a personal insurance benefit, not income.
Why the payout is usually tax-free
- No income tax: The payout is not treated as earned income.
- No capital gains tax: The payout is not a profit on an investment.
- Paid directly to you: The lump sum is yours to use however you choose.
This means if you claim £100,000 on your critical illness policy, you will receive £100,000 – it’s as simple as that.
Why this matters for families
Knowing that a critical illness payout is tax-free means you can rely on the full benefit when you need it most. For example:
- It can help your monthly mortgage payments, removing one of the biggest financial pressures.
- It can help fund specialist care, rehabilitation, or home adaptations.
- It provides peace of mind that your family won’t face immediate money worries during a difficult time.
Critical illness cover vs other policies
- Life insurance: Like critical illness cover, life insurance pays out a lump sum that is typically tax-free for your loved ones, though it may form part of your estate where inheritance tax could apply if your policy isn’t written into trust.
- Income protection: Payments from income protection policies are generally tax-free if arranged personally, but may be taxable if provided through an employer.
Understanding these differences ensures you select the right combination of policies for your situation.
Final thoughts
So, do you pay tax on critical illness payouts? No, the lump sum is designed to provide straightforward financial support without deductions, giving you security at a time when you need it most.
Our team can help you compare critical illness policies and make sure your protection works exactly as you need it. Get started with your free quote by clicking the button below.
