Contractor Income Protection
Contractor Income Protection is cover that replaces lost income during periods of incapacity. Unlike permies, independent professionals have no employer to pay them when they’re ill. If they can’t work, they don’t get paid.
Through Freelancer Financials, taking out cover (PHI) is a painless procedure. Contractors with this foresight can protect up to 70% of their income.
They’ll also have a choice when to pay tax. Pay premiums through their Limited Company, then they pay tax upon receipt of benefit. If they pay their premiums after tax, benefits are then received tax-free.
Why do Contractors need Permanent Health Insurance?
In an ideal world, people turning to contracting would take out PHI from day one. Coming from a permie background as most do, income protection is often overlooked.
That’s because we take many of the ‘freebies’ employers provide for granted. In the hullabaloo of setting up our own business, there are understandable oversights. Death in Service benefits, sick pay and statutory holiday pay? They become something of an afterthought.
What we don’t like to see is our clients exposed to unnecessary risk. Especially when they’ve worked hard to get a mortgage or have other financial commitments.
They become ill, can’t work and that “PHI” on the bottom of To-Do List? It becomes an overnight priority. By then, it’s often too late to make a claim.
For what the premiums cost, income protection cover is an absolute no-brainer.
How to protect your independent lifestyle
More people suffer a work-preventing serious illness than those who die before they retire. Obvious, I know. But it does beg the question:
“why do contractors take out life insurance, but not serious illness cover?”
Income Protection is a critical step towards establishing and maintaining your financial security.
There are several reasons contractors don’t take out cover, other than oversight:
- there’s always something more important to do;
- thinking that we could get ill is maudlin;
- it’s not one of the glamorous tasks they envisaged for their new lifestyle;
- they don’t know how to or how much to cover themselves for.
We can advise you on the latter. While the other points may have merit, protecting your livelihood is no less important.
If you do get ill, Heaven forbid, you’ll be thankful for the day you applied for cover. Or you’ll find a peace of mind that only comes with the assurance of a protected lifestyle. Win-win.
Income Protection: how it works
One reason contractors defer taking out PHI is because they don’t know how. Our service aims to demystify the process, making it easy for you to cross off the to-do list. So, here we go, in plain English.
Permanent Health Insurance pays the policyholder until they recover enough to return to work. Or until the plan matures, whichever comes first.
Benefits are tax free when you pay premiums from your personal income after tax. Or they become taxable upon receipt if you pay them pre-tax through your company.
If your company pays them, you can class premiums as a legitimate business expense. And as they’re not benefits in kind, they’re perfect for limited company contractors.
How long should I wait for my pay out?
The time you choose to wait before receiving benefit insurers call the “deferred period”.
Most contractors set the deferred period somewhere between four weeks and one year. The longer you set the deferred period, the less the cover costs.
How long you choose will depend on your unique circumstances. There is no right or wrong, but we’ll help you decide which is most suitable for you.
If you have a large nest egg, you can lower the cost of the policy by waiting longer for your first pay out. If you’re new to contracting with little in the way of savings, you may want paying sooner.
Once we know more about you, we’ll help you find the policy specific to your needs. This client-centric approach is the only way of ensuring that you’re 100% covered.
Policy terms and conditions to watch out for
Many policies stipulate that they’ll stop benefits once the policyholder is ‘fit for work’. If you’re an employee, that’s cut and dried.
As a self-employed entity, that clause takes on a sinister meaning. “Fit for work” may mean work that falls outside your speciality.
You may not be fit to return to the oil and gas industry, but you may be well enough to stack shelves. Your policy must cover you until you’re fit to return to your own occupation.
Lesser definitions within policies are prone to take advantage of ill health. They may enforce you to carry out any form of work. Undertaking unskilled labour won’t guarantee the income you earned in your contract role.
You may also want to ‘inflation-proof’ your protected income. There are ways and means to scale how much you pay. You can even select your premiums to increase every year at a set percentage.
And one final note of caution. Some policies may have a limit on age or illness duration. As a minimum, you want to receive benefit right up until you retire.
When you’re ill, the last thing you want is the stress of unpaid bills. It can impair your recovery and have a huge impact on your life. When taking out contractor income protection, make sure it does protect your income.