Protect your income

Essential guide to income protection cover for contractors

Protection insurance
Author: John Yerou

The need for independent contractors’ income protection stems from a basic reality: if you don’t work, you don’t get paid. This guide outlines what the cover is, and how to choose the policy that benefits you the most.

Permanent employees — as you’ll know, having once been one — benefit from SSP (statutory sick pay) and holiday entitlements. Professional contractors operate without this safety net.

Transitioning to complete self-sufficiency necessitates robust financial planning. Our protection experts aim to provide comprehensive sickness cover that matches or betters that of traditional employees.

Table of contents

  • Key features of income protection for contractors;
  • The mechanics of contractor income protection;
  • Complimentary policy review for existing cover;
  • Determination of relevant waiting (deferment) periods;
  • Income cover parameters;
    • Tip: tax planning for limited company contractors;
  • Shifting priorities during extended incapacity;
  • Critical considerations for income protection planning;
    • Tip: ensure policy specifies “own occupation” income protection;
    • Professional consultation with protection specialists.

Key features of income protection for contractors

Independent contractors must proactively safeguard their financial stability. Our policy provider has designed its income protection policies to:

  • replace lost income during periods of absence and incapacitation due to illness or disability;
  • provide a consistent monthly income following a predetermined waiting (deferred) period;
  • secure up to 65% of contract income, with potential for higher cover (up to 80%) in executive policies;
  • offer protection extending unto retirement age.

Selecting an appropriate policy, one tailored to your specific situation, is paramount. Our protection specialists can help match suitable cover to individual lifestyles and career trajectories.

The mechanics of contractor income protection

Being without employer-provided sick pay means contractors need a financial contingency plan. Replacing SSP is, in essence, what contractor income cover is.

Protection policies mitigate the risk of loss of income by providing financial support when a contractor needs it most. With the right cover, illness-affected contractors can support themselves and their loved ones with monthly payouts of up to 65% of their contract income. This increeases to 80% for executive cover policies.

Our protection team can help contractors break down exactly how much income they potentially need while they’re off work. This ensures that contractors:

  • never pay too much for their policy, and
  • provide themselves with a stress-free environment during which they can recuperate.

That last point carries much weight. Policies will only continue to pay provided claimants can show they’re making strides to return to work. Any anxiety over not being able to pay the bills will only be detrimental to recovery.

Complimentary policy review for existing cover

For contractors with existing policies, we offer a complimentary policy review service. This is because the longer a contractor remains independent, the more likely it is that their lifestyle changes.

Cover that doesn’t provide for the policyholder isn’t cover at all. So, our service ensures that our clients’ income protection remains:

  • relevant to the contractor’s professional status, and
  • aligned with current and future financial and personal circumstances.

Determination of relevant waiting (deferment) periods

The deferment period is the time between the day a contractor makes a claim and receives their first payout (benefit). Think about it in the same way as an insurance policy’s excess fee.

Policies offer deferment periods ranging from 4 to 52 weeks, during which the contractor must support themselves. So, income protection benefits start after the designated waiting period.

The longer the contractor can defer their first benefit, the cheaper their premiums will be. But they shouldn’t opt for cheaper premiums if they haven’t got the means to self-fund their lifestyle until they receive the first benefit.

Income cover parameters

Personal income protection policies can cover up to 65% of income. Executive policies can extend to 80% of income, using combined salary and dividends.

Contractors must determine what they’d need to get by on as an absolute minimum. So, both accurate income assessment and budget planning are crucial. Only when they’re visualised can the contractor determine appropriate cover levels.

Tip: tax planning for limited company contractors

Limited company contractors can choose to pay their premiums before or after tax. Which way they prefer depends on their outlook and financial status.

Option one is to pay their premiums through their PSC. This way, they will only pay tax on the benefits they receive after making a successful claim.

Alternatively, they can pay their premiums out of their own pockets after tax. They will then receive tax-free benefits if and when they make a claim.

Shifting priorities during extended incapacity

If a claimant is diagnosed with a serious illness or suffers a significant injury, their priorities will change. Extended periods of incapacity could mean significant adjustments around the home, plus shuffling finances to accommodate them.

Depending upon the extent of the condition, any contractor may have to consider:

  • specialised transportation requirements for multiple trips to hospital, especially if the condition prevents the claimant from driving;
  • arranging domestic assistance, and paying any associated incumbent expenses;
  • the potential reduction in a partner’s working hours to accommodate care;
  • property modifications for decreased mobility and accessibility;
  • increased expenses for home heating and entertainment subscriptions.

Proactive planning is key to mitigating the impact of the unforeseen brought about by illness or injury.

Critical considerations for income protection planning

Selecting a suitable income protection plan requires meticulous evaluation of factors such as:

  • the chosen provider’s claims history and financial stability;
  • the policy’s definition of insurable income;
  • policy implications where the policyholder succumbs to illness or injury between contracts;
  • specific physical and psychological rehabilitation and return-to-work support;
  • the maximum payout duration (defined or until retirement).

Policy efficacy and relevance are paramount; inadequate cover is tantamount to no cover at all.

Tip: ensure policy specifies “own occupation” income protection

A key reason contractors use specialist income protection providers is to maintain their lifestyle should they become ill. A generic policy may deem “fit for work” as fit to undertake any role.

Skilled contractors would suffer doubly if their doctor signed them off prematurely. To continue to receive benefits, a generic policy might dictate that the claimant take any job, including unskilled labour. These policies don’t consider the role the contractor specialises in as the only feasible return to work option.

This would not only mean a (probable) drop in income, but also jeopardise the contractor’s recovery. To avoid this scenario, contractors must ensure their policy includes the “own occupation” clause.

Professional consultation with protection specialists

Freelancer Financials’ protection specialists offer comprehensive consultation services. We ensure competitive premiums and utilise providers with proven claims records and contractor-specific expertise.

We urge all contractors to assess: the potential impact of long-term incapacity; evaluate affordability; and consult with protection specialists. Only then can they secure adequate cover. Inadequate or irrelevant cover provides no financial security whatsoever; you deserve better.