Contractor protection guide to safeguarding your income, home and family

One of our founding principles in 2004 was that insurance go hand-in-hand with a mortgage. We’re even more resolute about that premise today.

Why? We know how hard contractors work to get a mortgage in the first place. Once they’ve secured it, they don’t want to risk losing it. That drive to protect their livelihood and families echoes our desire to provide cover as a staple alongside contractor mortgages.

Our self-imposed duty of care mirrors today’s Consumer Duty

Our commitment to providing respective contractor cover was vindicated in 2023. From July 31st of that year, the FCA introduced a new law, a new Principle for Business. This law ensures that ‘general insurance’ and ‘pure protection’ providers offer customers nothing but the most relevant policy.

We’re very happy to see it on the statute book today! It has, after all, mirrored our policies right from the outset. But we’re not so self-righteous that we think we’re the be-all and end-all. You can read more about the Consumer Duty in the FCA’s dedicated PDF.

Why contractors need bespoke protection cover

Many financial institutions don’t understand how contractors’ pay works. That’s why they come to us for their mortgage. But the same principle applies to calculating what their Income protection benefit amount would be.

We have to be so careful to make sure the income used in our calculations is the right one. As an example, imagine a contractor earning £800 a day over a 46-week period.

Our mortgage advisors can use the full amount when working out mortgage affordability. However, if the contractor is outside IR35 and operating through a limited company, it can muddy the waters for protection.

They may only be declaring income up to the threshold of £50,000 for tax efficiency. This is understandable, but has a massive impact on their income protection cover.

The contractor may be able to receive and ultimately be able to get paid out on claim up to that £50k. This in no way reflects the income they need to protect.

Our USP is that we understand not only the product but also how to apply it to their needs and income structure. This is a huge area which gets overlooked.

Many contractors think that by going online or direct, they can get adequate cover. This is not the case, which is why they need a contractor protection specialist!

What you’ll learn in this guide about contractor protection

To underline this point, we’ve outlined both generic and contractor-specific cover side by side in this guide. In all, the guide comprises seven easy-to-understand sections. Together, the sections will help you prioritise how to protect your income, your home and your family:

1. Income protection
2. Income protection as a contractor
3. Life insurance
4. Life insurance as a contractor
5. Critical illness cover
6. Critical illness cover as a contractor
7. Future-proof cover in 2025/26? It’s the only way to go

1. Income protection

Income protection is an insurance policy for which you pay premiums monthly. When you’re unfit to work, the policy pays you a regular, tax-free income.

The bills don’t stop just because you’re unfit to work. You may be ill, have had an accident, or be in recovery from a diagnosed condition. You still need to pay your mortgage or rent, bills and day-to-day expenses. That’s when income protection kicks in.

What does income protection cover?

Income protection covers a proportion of your income if an accident or illness prohibits you from carrying out your job.

Muscular-skeletal condition? You’re covered.

Mental health condition? Covered, too.

Cancer? Yes, an income protection policy can cover you.

Will income protection cover me if I’m out of contract?

Income protection is, in its most basic form, sickness protection. It’s there for when you’re incapacitated, unable to carry out your current contract. That fault could be through an illness, a medical condition or an accident.

Income protection isn’t there to cover your expenses when you’re out of contract. Some policies may have a ‘grace period’ for if you get sick between contracts. But, if that’s a concern to you, do mention it in your discussion with our protection specialists.

Income protection policy types, terms, and considerations

Illness, accidents, and medical conditions have no set recovery timelines. That’s why policyholders look for an income protection policy that pays out until they’re fit to return to work. This is a ‘full-term’ policy, and will pay out monthly, no matter how long recovery takes.

There are alternatives to a full-term policy. If you’re on a budget, consider a 5-year, 24-month or 12-month policy, instead. As their names suggest, they’ll pay out for their respective set terms rather than indefinitely.

As a rule, the shorter the term, the less the premiums cost. But cost shouldn’t be the only factor when deciding which policy to take out. You should also ensure that the policy and/or term is relevant to you and how you work.

No matter which policy you choose, you’ll get immediate peace of mind. Whatever bump in the road life throws at you, you and your family are protected.

2. Income protection as a contractor

We advocate contractor income protection as offering financial reassurance to all our customers. But, with contractor income protection, it’s slightly different.

Every contractor must decide on their policy’s ‘deferment period’. That’s how long they’re willing to wait between being ‘signed off’ work and the policy payouts starting. This matters, both for making your policy work for you and for the amount your premium will be.

Deferment periods

Our income protection advisors have seen many different deferment periods from different insurance providers. You’ll be able to choose up to 104 weeks before you start receiving payouts.

Most contractors won’t want to wait that long. As a guide, between one and six months is a popular choice. But every contractor’s situation is unique. When deciding how long to wait before you receive your first payout, consider:

• Any ‘sick pay’ you may be entitled to via an umbrella company
• Any savings you have, and if you’re prepared to sacrifice them to cover recuperation
• What you can afford to pay for your premium (the longer you can wait for your first payout, the lower the premium typically is)

Income protection v savings

An often-heard response we get from contractors temporarily too ill to work is that they’ll use their savings to get by. There are two problems we see with ‘savings reliance’:

The first is this: yes, we get it! Contractors do still land very lucrative assignments. But even then, it’s easy for the breadwinner to overestimate how long their savings will last. Most UK households will run their savings account dry in just 19 days!

Secondly: why should you? You’ve worked hard to set aside that nest egg. Do you really want to spend it on bills and day-to-day expenses? Income protection will help you safeguard your savings as well as your lifestyle. You can then use your savings for what they were intended when you’re better.

How much does an income protection policy pay out?

Generally, policies pay out up to 65%† of a contractor’s gross annual income, tax-free. But, with unstable inflation, how will 65% of your income today fare five years from now? It will likely be worth a lot less.

You could consider an “index-linked” policy if covering yourself for just under two-thirds of your income is less than you hoped. If it’s index-linked, your cover adjusts upwards with the cost of living.

That said, replacing up to 65% of your contract income tax-free when you’re ill or immobile is a considerable wedge. Our income protection policies will help you achieve exactly that.

Need to protect more of your income? Executive income protection covers up to 80%, plus offers many other benefits.

Your family can benefit too

At its most basic, income protection protects your home and provides for you and your family. But some providers today take a holistic view of getting you back to work.

Some policies we offer have contractor-specific services ‘bolted on’. Typically, they include 24/7 remote GP access, a second-opinion service and a prescription service. Yet others go even further by offering counselling and mental health support. And our bespoke contractor income protection policies even come with business, legal and tax advice!

Furthermore, while it’s your name on the policy, your family can benefit from this nuanced approach to income protection, too.

3. Life insurance

Life insurance can be a more emotionally-charged insurance policy decision. With our brokers, though, it doesn’t have to be. If you prefer, they’ll get straight to the practicalities of life insurance. With life insurance, you can:

• Ensure your family receives a lump sum (tax-free) upon your death
• Alter your payouts to have them provided to your family every month
• Settle other death-related costs, like funeral fees, your mortgage, or other unsettled debts (like school fees), using your policy payout.

4. Life insurance as a contractor

Before you became a contractor, you probably worked a stint as an employee. And, as an employee, your contract would have likely contained a Death in Service benefit. That benefit would pay a multiple of your gross salary should you die while working that role.

As a contractor, you don’t get any benefit unless you take out a policy yourself. Contractor life insurance is a surefire way of providing for your family should you die while you have an active policy.

But, contractor life insurance works a lot differently from standard life insurance. It’s critical you pick the policy most suited to your lifestyle and the way you work.

The top four contractor life insurance policies our customers buy

Here’s a brief overview of the top four life insurance products that often appeal to contractors:

i. Level term assurance (LTA)

Contractors with financial responsibilities often opt for level term assurance. Neither the premiums nor the level of cover alter throughout the LTA policy term.

LTA remains the most popular life insurance product among the contracting community. It ensures that your survivors receive the amount you initially covered yourself for when you die.

ii. Decreasing term assurance (DTA)

Decreasing term assurance is ideal for contractors with an outstanding repayment mortgage. DTA centres on the amount you initially covered yourself for, decreasing over time.

These policies work by covering the cost of paying off your outstanding mortgage debt when you die. Over time, the amount you will owe your mortgage lender reduces as you pay off the balance. As such, your premiums lessen respectively.

iii. Family income benefit

Family income benefit is ideal for contractors with young families. The policyholder sets the amount your family would receive in monthly payouts at the start of the policy.

It’s up to you how long you set the policy to run for (the ‘term’). The premiums (what you pay in) are fixed for the length of that term.

After you die, the payouts will continue until the end of the term. As such, the closer to the end of your term you are when you die, the less total payout your family will receive.

iv. Relevant life cover

With Relevant life cover, the premiums are paid to the insurance provider by your contractor limited company. Usually, these can be treated as an allowable business expense, meaning they are deductible against corporation tax, thereby reducing your company’s HMRC liability.

For the full rundown on Life Insurance products, ask our advisers about ‘Index-Linked,’ ‘Family Income Benefit’ and ‘Whole of Life’ policies.

Four must-ask life insurance questions

When you’re talking to one of our protection advisors, there are some questions you must ask. For some of the questions, you may already have an idea of the answers.

These are:

How much cover should I take out?

Consider all your dependents, your mortgage, other outstanding debts, and family events/future milestones. These can help guide you to a sum that genuinely reflects the amount your policy should cover you for.

How long should your policy last (the term)?

Some contractors like to choose their year of retirement as their policy cut-off date. For others, especially with today’s current propensity for 40-year mortgages, the end date will be when your mortgage is paid off.

How much can you pay in premiums?

As well as the amount you want cover for, your age, health and lifestyle dictate the cost of your premiums. If the premiums seem excessive, you can lower them by reducing the policy’s term.

But remember: with all insurance policies, they must do what you desire them to. It’s pointless scrimping on the premiums if the reduced policy doesn’t cover you when you need it.

What type of life insurance?

Our above section covering the top four contractor insurance policy buys gives you an overview of the popular policies. But they don’t cover your bases, ask us about ‘whole of life’ and ‘index-linked’ policies.

By getting to know you, we can help you choose the most pertinent policy for your now and your future.

Next steps

Once you’ve answered the four must-ask questions, it’s time to choose your cover. Once chosen, you can then place that life insurance policy into a trust.

Don’t worry! Placing it in a trust doesn’t cost anything more. And it’s a facility that many insurers offer to contractors today.

The practical effect of this step is key. With a trust, you get to choose the identity of the person to whom your life insurance policy will pay out. If the recipient is outside of your estate, they will then incur no Inheritance Tax (IHT).

 

5. Critical illness

A critical illness policy is wholly separate from both life and income protection covers. It’s there as a failsafe if you’re diagnosed with a potentially life-changing illness or condition.

Critical illness doesn’t supersede life insurance and income protection. And, if you are diagnosed with a critical illness, you’ll no doubt be thankful you took out the other two policies.

But critical illness cover serves a distinct purpose and will complement other insurances to safeguard your lifestyle. It pays a tax-free lump sum if you’re diagnosed with a serious illness covered by your policy.

What does critical illness insurance cover?

If you’re diagnosed with cancer, or suffer a heart attack or stroke, your policy will pay out (during your lifetime). These will help you cover medical costs, living expenses, and even mortgage payments.

Critical illness insurance also typically covers Multiple Sclerosis, Alzheimer’s disease and Parkinson’s disease. But, beware: not all providers cover the same conditions.

Living with critical illnesses

Advances in medicine, healthcare and science mean more people than ever beat their critical illness. But there’s much to consider between diagnosis and cure:

• You’ll be at home for long spells
• You’ll be dependent on the care of loved ones or a professional/qualified carer
• You may need home renovations to fit your house around your treatment/recovery
• You may have to fund the cost of being driven to appointments by relatives, their income may also suffer, due to taking time off to support you

6. Critical illness cover as a contractor

We’ve seen major changes in contractor critical illness cover over the past few years. Providers have introduced different levels of cover, starting from an entry-level “standard” to a more comprehensive one, “Enhanced”. The latter covers even more conditions, so it’s always worth reviewing your existing policies.

Our protection specialists and providers understand contractors and contract work. Our specialists will ask you at least three key questions to start with. These will ensure your critical illness policy doesn’t overlook key contractor scenarios:

1. How capable will you be of continuing your current contractor assignment post-recovery?
2. How will taking on a different engagement (with possibly fewer hours and less pay) affect your post-illness lifestyle?
3. How will you fund being very likely to face higher home energy/utility bills, and potentially relying more on home-based subscription packages?

Critical illness cover is different to life insurance and income protection. That difference extends to pricing, but with good reason.

You are five-and-a-half times more likely to activate your critical illness policy than your life insurance policy. Because of that, critical illness cover is approximately five times pricier than life insurance.

How much critical illness cover should you take out as a contractor?

Our protection specialists can work out expertly how much critical illness cover is appropriate for you. To do that, they’ll need background information, ranging from your age to your family’s medical history.

Typically, the level of critical illness cover that’s best for you will depend on:

• What you are looking to protect yourself from, and
• The monthly payments you can readily commit to achieving such protection

Like many contractor protection policies, you can also add children to your critical illness cover. Similarly, the more you pay in premiums, the more your insurance will cover. And, as I’ve mentioned before, it’s not true cover if it won’t do what you need it to when you claim.

7. Future-proof cover is the only way to go

With no Statutory Sick Pay (SSP) to rely on as a contractor, income protection will fill the void. With no ‘death in service’ benefits extended to you as a contractor, life insurance fills that vacuum. And, with no crystal ball, critical illness cover covers many more bases.

We believe this protection trio is essential to staying secure, whatever comes your way. It’s not just your life and your lifestyle that these protection policies can protect. It’s your family’s livelihood and lifestyle too.

Some have you may have existing safeguarding policies in place. We can still help. Our team is trained to find innovative ways to bolster that protection. That’s even more poignant if the policies you have, you’ve had for a while.

Contractor protection has changed. Ensuring your future doesn’t upend your life is even easier today. Start the conversation today. Whichever contractor cover you need, we offer untold peace of mind against life’s many uncertainties.