Five reasons income protection is a contractor's superpower

Most contractors think that becoming an independent professional is the best move they ever made. You might even call it their 'superpower'. But that doesn't mean they're indestructible.

Every superhero has their kryptonite; their nemesis. Contractors are no different. Lacking a Captain America shield or wings made of steel, they're susceptible to illness or injury like every other mere mortal on the planet!

For those reasons, we have contractor income protection. It pays you a percentage of your income when you're too ill to work, starting at 60% but sometimes up to 80%. If that's not enough of a reason on its own, here are the top five reasons contractors take out an income protection policy, writes Daniel Gibbs, head of protection at Freelancer Financials.

1. Payment when you're off sick

When you were employed, your employer would have paid you a percentage of your income for a specific period of time. In real terms, as a limited company contractor, you are your employer. As well as your responsibility to fulfil your contract, you're responsible for paying yourself when you can't work.

Whether you work as a ltd company or umbrella contractor, there's a policy for you. For limited company contractors (also known as personal service company contractors), executive income protection is the best fit. That's because you can protect up to 80% of your salary and dividend drawings, with options to protect your NICs and pension contributions. Plus, you can claim corporation tax relief on the premiums if you pay them through the limited company.

With a personal income protection plan, you can protect up to 60% of your gross income. This policy is more suited to umbrella contractors, or those who switch between limited company and umbrella contracting.

2. Peace of mind

I reckon that I know what you're thinking when you see ‘income protection’ and ‘peace of mind.’ Perhaps, something like, ‘Yeah, yeah, yeah; keep my family in the style to which they've become accustomed while I'm ill. Great."

Well, there is that. But I want to diversify a little.

Illnesses are both physical and mental, with a greater focus on the latter since the coronavirus pandemic. It doesn't matter which type of illness you have: if you're worrying about paying the bills, it will slow down your recuperation.

More than that, the worry of meeting your mortgage repayments alone can compound your condition.

So, yes: income protection will protect you and your family's lifestyle. But it can also protect the integrity of your mental health -- a key component of getting back to work quicker.

3. Adapting to a new normal

I know everyone's sick of hearing about the ‘new normal.’

And I get that we're all waiting to see what it looks like, even though it's mostly crept up on us. But let's use the covid pandemic as a barometer.

You might say to yourself, ‘If I'm ill, I won't be going out to pubs or restaurants, or commuting to work. I'll save a fortune.’

Hold it right there. If you're bed-bound, on crutches or in a wheelchair, you're right, you can save. You'll probably venture out of the house very little.

But beware -- that doesn't mean your mind will stop craving stimulation.

If you're like most of us, media will be your default time-filler. That might mean you have to up your TV subscriptions, add to your movie or music collection or bury yourself in books. Those are all extra costs right there.

Get the foundations in place

And what about adapting the house to suit your needs? There'll be times when you're on your own and need to fend for yourself. But even when your families around you, you don't want to add to their burden, right?

Well, if you're immobile, you won't want to traipse up and down stairs. Does your doorstep or your doorway easily accommodate a wheelchair, front and back of your property?

You might save money by not going out. But you will definitely want to make your home environment as comfortable and conducive to recovery as possible. That's all got to be paid for.

And don't even get me started on cooling or heating your home. Anything you save on your commute, your boiler or air conditioning system will surely gobble up, if not more.

4. Protect your savings

You've worked too hard to set savings aside to fritter them away on paying for your time off contracting, ill. Personally, I can't think of many worst-case scenarios than squandering my savings on something that my family or I couldn't enjoy.

Your illness shouldn't jeopardise your family's planned holidays. You want to ring-fence that money and eventually use it for its original purpose. Income protection can be that wall.

Balancing your offset mortgage repayments

And what about if you've got an offset mortgage?

Your savings are the reason you're paying less interest every month.

If you start chipping away at your savings, the balance against your mortgage will start to creep up. So, rather than just being an inconvenience, not having income protection can actually start costing you money!

5. The importance of 'own occupation'

When you were an employee, there was never a question that, once you were deemed fit for work, it would be for the role you occupied.

This isn't necessarily the case with contractors.

Part of the benefits of our income protection plan is access to counselling, physiotherapists and other health professionals. These play an important part in your rehabilitation over and above any support you might get from your GP.

All income protection providers want you back at work ASAP.

But, with some policies, 'work' can take on an ambiguous definition. You may not be able to undertake your own role, but you might be fit enough to take on a role.

Getting back on your own 'horse' – aka data entry, your new oil rig

While the provider's intention might be genuine, you returning to a role beneath your previous station may have all sorts of consequences.

First, there's the monetary side of things. But there's also the psychological aspect to consider.

What would it do to your self-esteem if you were deemed unfit to return to, say, an oil rig, but your GP signed you off as able to take on a low-paying data-entry role from home?

Being saddled with that type of work could have all manner of implications. It could also further prevent you from getting back to your own role.

Contractor income protection ensures that, when your GP signs you off as fit for work, it's for the role you undertook as a contractor. Furthermore, it'll only be when you're ready.

Five reasons contractors can’t afford to be without income protection? Done

So there you have it -- the top five reasons contractors take out income protection. There are many more.

For those who've benefitted from such a policy, it'd be great to hear about it on ContractorUK’s forum or LinkedIn page. Or, if you have any specific questions, drop me a line. Good luck (and stay safe)!