Contractors are not compensated for their idle time, so they often need to ensure that they work to get the income they need. You would have been eligible for both statutory holiday pay and sick leave as a permanent employee if you wanted to be paid for off time. That safety net is gone if you work independently. This is where income protection can come into play as a type of insurance you need for your business.
Getting acclimated to complete independence is the largest transition from permanent to contractor. The goal of income protection providers is to make sure contracting endeavours have the same level of coverage as a regular 9 to 5 office job. Each provider will offer different benefits to contractors, which is why we have created this guide.
Continue reading to find out more about contractor income protection insurance and how to find the best option for you.
What Is Contractor Income Protection?
Executive income protection acts as a substitute payment for contractors who cannot perform their work and therefore can’t receive income. This can be due to several reasons, such as illness or injury. Payments like this can be paid off from the time you acquire it to when you return to work, retire or pass away so you are covered for as long as you need it.
It can cover up to 80% of your salary and dividends, which includes pensions and national insurance contributions. This can either be paid to you as a salary, or left in the business to help in a time when income might be lower than usual. It is common that a contract company owner would spread their income between themselves and a partner or spouse in order to maximise the income tax benefits. This is why executive income protection can ensure a joint level of income as a contractor.
To put this into perspective, a contractor who earns £80,000 a year could find income protection cover for an affordable price, usually ranging from £30-40. This could stay the same for however long you have the insurance or it can increase depending on which policy you have acquired.
How Does Contractor Income Protection Insurance Work?
You will get paid monthly by income protection insurance if you’re a contractor who cannot work. This will cover your regularly monthly outgoings like household bills, groceries, mortgage and any outstanding loans. Here’s a basic breakdown of how it works:
- Policy Setup: You determine the amount of cover you need and the ‘deferred period’, which is how long you can go without a payout before the policy kicks in.
- Policy Duration: Coverage can last for however long you want and typically lasts until you return to work, retire or pass away.
- Premium Payments: You will have to pay regular premiums for the insurance coverage, which will be different for every provider.
- Claim Trigger: You can claim if you’re unable to work due to illness or injury, and the waiting period has passed.
- Income Replacement: The insurance provider pays you a pre-agreed monthly amount to help cover your living expenses.
What To Consider When Taking Out Contractors Income Protection
Before a contractor can consider taking out income insurance, they should consider several factors to ensure that it’s the right choice for them. You need to know the best deal for you and how it can best cover the work you do as a contractor and your reasoning for missing work. Here are some key considerations:
You Need a Benefit Amount
Income protection will usually cover around 50-80% of your gross salary as a contractor, but the amount you’ll need will depend on certain circumstances. You can go for the maximum cover amount, but this might not be necessary as it will end up being more expensive in the long run. However, if you can afford this, it won’t be an issue. You should consider your core contractor outgoings first and align your benefits with them.
Deferral Period Length
The length of time between you making a claim and your benefit amount being paid out is called the deferral period. This will vary heavily depending on several factors and can be anywhere from 1 to 52 weeks. It’s worth thinking about if you do have savings and can afford to choose a longer deferred term, as it will result in lower premiums.
Short or Long Term Plans
Contractors should consider how long they want their benefit to be paid out for, with many insurers offering short and long-term plans. If you only need a payout for a few years then you should opt for a short-term solution, whereas a long-term can be an open ended policy that keeps paying out until you need it to stop.
Policy Expiration Age
There is an age limit as to when you can no longer obtain this insurance policy. It will align with most people’s retirement age, as many providers allow you to stay on the policy up until you turn 70 years old. However, most policies avoid this age range due to slightly increased premiums compared to the ones that end at 60 or 65.
Premium Type
The premium type that you choose will have a difference in costs, as some will increase over time and some will not. There are three main types of policies you can select when dealing with income security insurance for contractors. These include:
- Reviewable Premiums: These are premiums that can be reviewed by insurers at any time. Your premiums may increase in a year due to the number of claims made.
- Age-banded Premiums: These will increase over time, but only by a percentage that reflects the greater risk of claims as you age.
- Guaranteed Premiums: This is a fixed premium that will never change over time. They will be initially more expensive but will work out to be cost-effective in the long term.
The type of premium that you choose as a contractor will depend on your preferences, as each of these has different ways of paying it back and comes with a range of alternative benefits.
How Do I Claim Income Protection Insurance?
It’s important to understand how to claim income protection insurance as a contractor to ensure that your claim is effective. There are four main steps to the claims process:
- Contact your chosen insurance provider
- Complete an online claim form
- Submit any medical evidence to support your claim
- Submit any financial evidence to support your claim
Following the completion of this process and the insurer’s approval of the claim, monthly payments will be made to your bank account. This will go on until either your claim term expires or you can resume work.