Income protection: the gulf between perception and reality

A recent survey from LifeSearch and HomeOwners Alliance has shed light on how poorly most homeowners understand income protection.

The findings are striking enough on their own. But read them through the lens of independent contracting? A genuinely troubling picture sharpens considerably.

True, the survey focused on homeowners broadly. But contractors face every one of the misconceptions it identified, plus some that are uniquely their own.

What the research found: alarming misconceptions

Almost half of homeowners wrongly believe that income protection pays out if they’re made redundant. But the truth is, income protection covers illness or injury, not job loss. That’s a fundamental misunderstanding of what the product does. Moreover, a significant proportion of workers expecting to benefit from it hold this misconception.

The confusion becomes most pronounced among those who already have a policy. 61% of homeowners with income protection wrongly assume that losing their job triggers a payout. In short, those most likely to make a claim are the least likely to understand what their policy covers them for.

One in five homeowners believes state support is sufficient if they become unable to work. That figure rises to 42% among under-35s. In reality, Statutory Sick Pay currently stands at around £500 a month. For most mortgage holders, that falls far short of their monthly repayment, let alone any essential bills.

That gap between perception and reality is serious for any homeowner. For a contractor, the protection gap can be catastrophic; this is what we mean.

Why contractors are more exposed than most

Here’s what the survey doesn’t address directly. For self-employed people, there’s no entitlement to SSP. Salaried employees can at least partially rely on the (already-inadequate) state safety net. But that support simply doesn’t exist if you work through a limited company or on a contract basis.

Unlike most employees, many contractors have little or no access to Statutory Sick Pay. Contractors operating through their own limited companies may qualify if they’re paid a sufficient PAYE salary, but many deliberately keep salaries below the qualifying threshold.

And what if your salary qualifies you for Statutory Sick Pay? Operating through your own limited company, you’re effectively responsible for funding that sick pay yourself. Your company is, after all, the employer.

This shortfall matters because contractors’ financial lives lack the built-in buffers that PAYE employment provides. If you can’t work, you have:

• No employer sick pay scheme.
• No Group Income Protection from an HR department.
• No paid sick leave that activates automatically if a GP signs you off for a month (or more)

If you’re a contractor and you’re too ill or injured to work, your income stops. Your mortgage doesn’t!

Here’s another misconception that the LifeSearch and HomeOwners Alliance survey also found. More than one in five homeowners believe they don’t need income protection if their employer provides occupational or enhanced sick pay.

But enhanced sick pay:

• Is paid at an employer’s discretion,
• Has a limited duration, and
• Doesn’t move with you if you change jobs

Not that this last revelation applies to contractors. But you can see how deeply income protection confuses homeowners. But whose fault is that, really?

Why the industry is paying attention

The protection gap isn’t going unnoticed. And one of the mortgage market’s most contractor-friendly lenders is leading the charge.

In March, Skipton Building Society announced a strategic partnership with LifeSearch. It shifts the mutual from a single-tie arrangement to a broker model. The move also gives Skipton’s one million-plus members access to multiple insurers, who provide a wider range of:

• Life insurance
• Critical illness cover
• Income protection policies

The move follows research showing that over a third of UK mortgage holders have none of the above. And that’s despite nearly half saying they would struggle to pay their mortgage within six months of losing their income. 21% said they’d struggle within two months. That’s scary!

We’ve worked with Skipton for years. They’ve spent years developing mortgages suited to contractors’ income structures.

That they’re now investing in broadening their members’ access to protection products is significant. It signals that the industry increasingly recognises that getting someone into a mortgage is only part of the job. Protecting their ability to keep paying it is another key factor and a major responsibility.

The contractor-specific case for income protection

Arguments for income protection are stronger for contractors than almost any other group of borrowers. Here are several reasons:

Contract income can stop suddenly:

• A contract can end
• A client can pause a project
• Illness can take you out of work at short notice

Unlike an employee, you have no cushion between working and not working. Income protection can bridge that gap if illness or injury is the cause. But let’s just repeat it. As the survey makes clear, it will not cover you if the contract simply ends.

Lenders based your mortgage affordability on your full earning capacity. The specialist lenders we work with—including Skipton—assess contractors using their annualised day rate. That’s a genuinely strong affordability case. But it also means your mortgage commitment reflects that earning level. Protecting your repayments matters.

You have no employer safety net. There’s no occupational sick pay, no group income protection scheme. You have no HR team managing a return-to-work plan.

What happens if your GP has to sign you off for six weeks, three months, or longer? Income protection may be the only thing between you and a mortgage you can’t service.

What income protection does (and doesn’t) cover

Given the scale of the misconceptions identified in the research, it’s worth being clear.

Income protection pays a regular income if you are unable to work due to illness or injury. The payout is typically between 65% and 80% of your normal earnings, depending on your policy/payment structure.

Most policies have a deferred period: a waiting time before payments begin. After that, they pay out until:

• You return to work
• The policy term ends*
• You reach a specified age

*If you close your limited company, you still have options. Ownership can change, e.g. if you move it to another limited company. Or you can convert the plan over to a personal one in many cases.

It won’t pay out if:

• You lose a contract
• A client terminates an engagement
• Work simply dries up

For that kind of protection, you’d need a separate product. And there are cover policies designed for short-term income interruption. But the two products serve different purposes. Conflating them, as the survey suggests many do, risks leaving you exposed at precisely the wrong moment.

Our responsibility to you

When we place a mortgage for a contractor client, completion doesn’t mean “job done”. Discussing income protection is part of what responsible broking looks like.

The LifeSearch and Skipton partnership reflects a growing industry consensus. Protection conversations need to happen alongside mortgage conversations, not as an afterthought. We’ve always believed that.

If you’ve recently secured a mortgage but not yet discussed income protection, have that conversation now. It doesn’t matter if you’re a first-time buyer, homemover or have remortgaged. You need to protect those mortgage payments with bespoke contractor income protection. It’s so different from PAYE income protection, they hardly bear a resemblance.

The wrong type of income protection isn’t worth the digital ink it’s written with. We can talk through what cover might look like for your circumstances. And we’ll make sure the safety net you think you have is the one you’d actually need. Have that chat today.