Income protection: facts and FAQs -- final five

Income protection for contractors in the eyes of contractors isn’t always immediately understood.

In fact, with income protection, we’ve been asked in effect ‘Is it like broadband?’

And ‘Will a nurse visit me at home?’ plus arguably the most contractor-esque, ‘Are my earnings just so astonishingly large that there’s no income protection policy that can cover me?!’

Maybe in this sense, having last week tackled what IP does and doesn’t cover, and initially guided contractors through the basics of income protection, we really have saved the best till last, writes Daniel Gibbs, head of protection at Freelancer Financials.

Here’s five facts/FAQs on income protection no self-respecting contractor can afford not to know.

1. Does the provider of my income protection insurance policy contact hospitals/GPs to check up on my claims in person with me?  

Here’s the answer to what we suspect you’re asking – ‘Yes, the insurer can indeed send a nurse to your house!’

And remember, as we’ve previously advised, if an income protection provider discovers you’re working during a period you are claiming on, they can and will take back money. And probably cancel the policy to boot.

But keep in mind, you will always be in a better position working than you will be not working.

Insurers therefore offer the support you need to get you back on your feet.  

In fact, the majority of providers offer free value-added benefits, including: 

• Counselling, 
• Physiotherapy, 
• 24hr GP; and
• Other benefits.

2. If I stay with the same income protection provider for a long time, will my income protection policy premiums become uncompetitive? 

No, income protection is not like broadband!

Your premiums remain the same throughout the term of the policy as long as you have chosen a policy that has ‘guaranteed’ premiums.  

Be aware, you might find income protection policies that look cheaper from the outset.

But these will usually increase annually on your birthday. These are called ‘age-related' policies. 

Worth remembering here is that the longer you leave yourself and your income unprotected, the greater the chance that your premiums will increase. That’s because the older you become, the higher risk you have of becoming ill in the insurer’s eyes.

The best thing, therefore, that you can do is to insure yourself while you’re young and healthy, because the premiums will never be cheaper than at this stage. 

3. What if my lifestyle is so expensive that I think income protection won't cover my outgoings? 

Slow down there big spender!

You might be reassured to know that income protection usually covers up to 60% of your gross income.

If that's insufficient, look at your essential outgoings and make sure you cover them. 

So-called ‘executive’ income protection policies cover up to 80% of salary and dividends.

Such policies can also cover NICs and pension contributions too.

If you're a limited company director, you need this continuity to allow you to maintain pension contributions, otherwise it can adversely impact you when you retire. 

4. Is there any policy where the amount is NOT decided by how much I pay? 

Your income protection payouts are based on what you decide to cover, not necessarily the actual cost of your premium. 

5. Is IP an allowable business expense for my limited company?  

If your income protection policy is an executive policy, yes, it is an allowable business expense in HMRC’s eyes.

Plus, you’ll save on corporation tax when compared to deducting the premiums from your net income. 

Income protection facts and FAQs: final thoughts on this final five

Not all of the above questions will be relevant to everyone, and nor will many of the 10 we covered last week. But hopefully our answers prove that income protection can be flexible -- to a degree.  

Of course there are protections built-in to stop people from abusing the system. So we’d always recommend talking to an adviser familiar with contracting, so that you don't genuinely fall foul of some of these safeguards. 

Lastly, remember -- Honesty is the Best Policy. That's just as true for income protection insurance as for any other walk of life!