Guide to Income Protection Insurance for Contractors

Why do contractors need income protection? Quite simply, if contractors don’t work they don’t get paid. As a permanent employee, you'd have qualified for sick pay and statutory holiday pay. Now that you're an individual entity, that safety net's no longer there.

Getting used to being wholly self-sufficient is the biggest step up from permie to contractor. We're here to ensure you're at least as covered in your new venture as you were as an employee.

What are the key features of income protection for contractors?

So, what's in it for you? Why should you take out separate policies to ensure you maintain the lifestyle you're trying to build? Some of the advantages of income protection are that it:

• replaces lost income during periods of incapacity, such as serious illness or disability;
• pays a monthly income after your chosen waiting period;
• protects up to 65% of your contract income;
• can protect you up until your retirement.

But which policy is right for you? Freelancer Financials will help you find the right level of protection to safeguard your situation, wherever you are in your chosen career path.

How does income protection for contractors work? 

Whilst you were a permanent employee, you probably benefited from at least 3 months’ pay in the event of an accident or illness. As a contractor, you're exposed to potential financial loss from the first morning you're unable to work.

We can show you how to protect yourself in such situations.

An income protection plan makes it simple to preserve your current standard of living. The policies, paid in monthly premiums, will support you financially over an extended period if you suffer an accident or succumb to illness.

In this guide, we'll clarify the confusion surrounding this type of protection and cut through the jargon.

Free review service for contractors with existing policies.

Some of you reading this will already enjoy this type of cover. For you, we provide a free review service.

Circumstances and goals change. Our life isn't static. Our free review can ensure that your current cover is:

• contractor-relevant, if it's a policy you've brought with you from a previous working life
• suitable for your current situation (work, family and finance) and future aspirations.

Is there a waiting period?

Income protection replaces the bulk of your earnings once you pass your designated waiting period. The waiting period is somewhat equivalent to the excess amount on home insurance. But, instead of this being monetary value, it’s a duration over which you’re happy to support yourself before the cover payouts kick in.

The longer your waiting period, the cheaper your monthly premium will be. But, the longer you defer the first payout, the longer you must be able to cover the lost income by your own means.

Deference periods typically range between 4-52 weeks. Your adviser will discuss which period suits your needs best once the two of you have talked more about your situation and goals.

You may have a ‘rainy day’ fund that you're willing to sacrifice to pay your bills over the short term. If so, you could choose a longer 'defer' period to keep the cost of monthly premiums down.

Conversely, if you have limited access to funds, you could choose a shorter initial waiting period. But, as your savings grow, you can review your income protection policy and extend the deferred period.

How much of my income can a policy cover?

Contractors can protect up to 65% of their income with a personal income protection policy. This expands to 80% of your annual salary and dividends combined with executive income protection.

But, when setting your level of cover, be realistic with the figure you'd need if you couldn't work.

Priorities change when you can’t work for extensive period

You might be able to cut back on areas of your usual expenses, if and where necessary. But, other areas of expenditure will come more sharply into focus; you may have to:

• rent a special or different car for mobility,
• pay for help at home,
• a working partner may have to sacrifice their own working hours, or
• adapt your property to suit any immobility.

You might not consider these drastic changes normally. But, your priorities will change almost overnight following an accident or the onset of a serious illness.

I get it. No one wants to broach this subject when they're fit as a fiddle. But none of us has a crystal ball; it's an area you need to address, and the sooner the better.

Knowing that you're financially secure is a tonic when you're ill and unable to work. If you can eradicate stress, you'll be able to focus on getting yourself better and back to work.

What you need to consider for your income protection plan

There's a sea of income protection policy variations to choose from. But the reality is that so many don't work for contractors. Or, they're substandard policies with hidden exclusions.

Amongst the many factors to consider when choosing the right plan for you include:

• the proven claims history of the provider;
• the provider's financial stability;
• what the provider deems as income (think salary, dividends and bonuses!);
• how the provider views your claim if you’re between contracts when you become ill;
• what support the provider gives you to get back into work when you’re well again;
• the maximum duration they'll pay out from the date you're entitled to payouts.

Cost is critical, too. But the provider and product you choose are just as important. If your policy doesn’t pay out when you need it, it's about as useful as having no cover whatsoever!

Still unsure? Talk your situation over with a protection specialist

Freelancer Financials' protection specialists will ensure that your policy premium is competitive. Moreover, they only use providers with outstanding claims records and who understand how contractors work.

Consider the potential impact of never being able to return to work as you know it due to serious illness. Work out what you can afford. Think about how your life would change if you couldn't work.

Then discuss the potential income policies available with a protection specialist. Together, you can ensure you and your dependents are covered should you be unable to work due to an accident or sickness. If your current cover doesn't guarantee that, it's not worth the ink it's written in.

You may also be interested in…

For more detailed info on the different policies designed specifically to help contractors protect their income, check out these detailed guides:

• Life cover insurance.

What is Life Insurance? Life insurance is an essential insurance policy for contractors as it can replace the employee death in service benefits that you left behind as an employee;

• Relevant life insurance for contractors.

Relevant Life Cover is a tax-efficient life insurance policy, set up by the company and pays out a tax-free, lump sum on the death (or diagnosis of a terminal illness) of the person insured;

• Critical Illness insurance cover.

Critical illness cover is designed to pay out a lump sum on diagnosis of a range of serious illnesses, unlike life insurance which pays out only on death or diagnosis of a terminal illness.