Contractor income protection does not work in the same way as, say, sick pay does for permanent employees. For anyone who works for themselves, the buck stops with them. Without cover, no work means no income.
But many independent professionals could get a raw deal if they don’t specify what they class as earnings!
The market perceives dividends, for example, as an investment, not as part of a salary. So a generic insurance company wouldn’t class all earnings as relevant for your pay out if you fell ill.
They’d only pay out a sum based on your salary, which most contractors keep low for tax purposes. When you’re relying on creature comforts to help you get better, £126/week won’t even cover your mortgage.
Choosing an insurer familiar with the contractor way of life
The whole point of income protection is to uphold your standard of living when you’re too ill to work. When choosing a cover provider, you must be confident that they can do just that: protect your income.
We work with partners whom we know to be contractor-friendly. But there’s no harm in researching contractor income protection yourself:
- check out the forums, see what other self-employed professionals are recommending;
- read testimonials on site, see what prior clients have said about an insurer’s service;
- read the small print: make sure that a policy covers dividends as well as salary.
What must my protection policy cover?
There are other key elements that will make a difference to you and your convalescence. From saving tax on the premiums to how long you wait for your first pay out all affect a policy’s efficiency.
How long should I wait for my first pay out?
All income protection policies have a default wait period. That means the duration between the first day you’re unable to work and your first pay out. You can, however, change that date (in most instances).
Your circumstances will dictate how far you want to push that slider.
If you’ve been contracting for some time, you’re likely to have savings. If you have three months’ income set aside (as most IFAs advise), your premium will be lower by choosing the three months as your wait period.
If your savings are earning little interest, as most are in the current climate, drawing on them is a viable consideration.
If you’re new to contracting, you may not have yet accrued a rainy day fund. In this instance, you may think about triggering your first benefit payment sooner.
Your premiums will be higher, the pay-off being that you receive benefit from the first month you’re unable to work.
How does tax work on income protection pay outs?
Whether you choose to pay your premiums through your company or after tax is up to you. There’s a tax benefit to both, so here’s how it works.
The first option is straight forward. If you pay the premiums from your personal account after tax, pay outs are tax free.
You can also choose to pay the premiums through your company. The premiums themselves are deductible against tax. But the benefit is not.
If you’ve paid the income protection premiums through your company, the pay out will go back into the company. Then, when you draw your benefit, you’ll pay tax and NICs on the amount.
How much of my income should I cover?
It’s so easy to underestimate the change of lifestyle you’d undergo if you were unable to work. Yes, there are savings you’d make. But there are additional expenses that may not be apparent until you’re sat there with your feet up.
It’s easy to spot what you’d save. Travel expenses to site, lunch on the go, even your laundry bill should all reduce when you’re confined to quarters.
But your reliance on creature comforts will rocket. Heating is the most obvious sink hole for your new expense sheet, but you also need comfort.
If your illness affects your mobility, there may even be an up front investment in making your home more accessible. Day time TV? You want Netflix or Amazon Prime, as well as upping your digital TV subscription.
Medication is also expensive. Your diet, thus freezer, would also need topping up. You may come to rely on convenience meals or go the other way, start a health kick.
Your income protection should enable you to do all this to speed up your recovery. That’s why it’s so important to find an insurer who’ll class dividends as earnings, not as an investment.
I am contractor (not cheap labour)
Another key feature – again in the small print – is the definition of ‘fit for work’. You’ve spent time building your brand, your company, your reputation. When you return to work, you want to make sure you’re going back to that role.
If you’re an IT contractor, for example, and stress has been a part of the problem, you may be a long way from a return to programming software. But a check-up by an insurer’s GP may deem you’re fit enough to do a less taxing job.
Not only will this have a negative psychological impact, but your earning potential could suffer, too. Not to mention the delay in your full recovery.
It’s paramount that your policy pays benefit until you’re able to return to your own occupation.
Long term illness – it happens
No matter who you are, there’s always the possibility of never making a full recovery. Many generic policies have a maximum duration over which the insurer will pay benefits.
When considering your own policy, check when your pension is due to kick in. You should at least cover up until you can draw your pension without suffering a penalty.
If you’re still young, you also need to consider inflation. There are policies that allow you to ‘fix’ your standard of living. In other words, your projected benefit rises in line with inflation.
There are set percentages you can increase your benefit by over time. This often means increasing your premium to suit, but at 2% or 3% per annum, the difference in negligible. Especially compared to the long-term benefit of locking in your current standard of living.
What next?
We’ve given you all the information you need to go source suitable income protection for you. You’re welcome to take this advice with our blessing and seek out your cover.
You could also do nothing (if you’re name is Clark Kent and you’ve destroyed all the Kryptonite on the planet).
Or, you could get in touch with us to sort it out for you. Time is money. When you have time on your hands due to illness, money worries shouldn’t get in the way of your recovery.
Leverage our hand selected partners today. They tick all the boxes and will provide invaluable contractor income cover in your hour of need.