Income Protection for Contractors: A Comprehensive Guide

Contracting offers independence and flexibility, but it can also bring financial risks, especially if you’re unable to work due to illness or injury. Without the benefits of a permanent employment contract, contractors often lack access to Statutory Sick Pay (SSP) or paid leave. That’s where Income Protection comes in — providing financial security during challenging times.

What is Income Protection?

Income Protection is an insurance policy designed to replace a portion of your income if you become unable to work due to illness or injury. Unlike other forms of insurance, Income Protection pays you a regular monthly income to help maintain your standard of living until you return to work or reach retirement.

For contractors, this type of coverage is invaluable, as it ensures that your business doesn’t come to a halt just because of unforeseen circumstances like illness. Whether you’re off work for a few days or unable to work for months or even years, this policy steps in to cover the gap.

What Does Income Protection Cover?

• Illness and Injury: If you’re unable to work due to an accident or illness, Income Protection replaces up to 60% of your taxable income. This helps you meet daily living expenses without the stress of financial instability.
• Return to Work: In cases where the illness or injury is temporary, Income Protection continues to pay out until you’re able to return to work.
• Long-Term Coverage: For more severe conditions, the policy may provide income until you either recover, retire, or pass away, offering long-term financial support.

What is Not Covered?

While Income Protection is comprehensive, it has limitations:

• Unemployment: The policy does not cover unemployment due to reasons other than illness or injury (e.g., redundancy).
• Pre-Existing Conditions: If you have an existing medical condition, it might not be covered unless it’s declared and specifically included in your policy.

Types of Income Protection Policies

Long-Term Income Protection

This policy provides coverage for as long as you are unable to work due to illness or injury, up until you return to work, retire, or pass away. It’s underwritten upfront, meaning you’ll know exactly how much coverage you’re entitled to from the outset. This policy is best for contractors who require stable, long-term protection in case of serious health issues.

Short-Term Income Protection

Short-term protection offers coverage for a set period, usually 1 to 5 years, rather than until retirement or death. This type of policy is ideal for those who may need temporary protection or contractors who anticipate a quicker return to work.

How Are Premiums Calculated?

Premiums for Income Protection depend on several factors:

• Income Level: The higher your income, the more coverage you’ll need, so premiums will be higher.
• Age and Health: Younger, healthier contractors generally pay lower premiums because they are less likely to make a claim.
• Occupation Risk: Some professions, particularly those that involve manual labor or high-risk environments, may result in higher premiums due to the increased likelihood of injury or illness.

Contractors typically insure between 50-60% of their gross taxable income. However, since contractor income can fluctuate, premiums can be adjusted based on your earnings and the level of cover you require.

The Deferred Period: What Does It Mean?

The deferred period is the time between making a claim and receiving your payout. You can choose how long you want to wait before your benefits begin. Typically, this period ranges from 1 month to 12 months.

• Shorter Deferred Periods: These cost more but offer quicker payouts, which might be necessary if you don’t have a significant savings cushion.
• Longer Deferred Periods: These lower your premiums but delay the payout, so they are usually chosen by those who have savings to cover expenses during the waiting period.

Choosing the right deferred period depends on your financial cushion and the level of protection you need.

How to Pay for Income Protection

Paying for Income Protection is straightforward:

• Personal Payment: Premiums are deducted from your personal bank account via direct debit, ensuring that your coverage is continuous.
• Tax-Free Benefits: Any claims you make are paid directly to your bank account and are tax-free because taxes and National Insurance have already been accounted for when paying the premiums.

This system ensures you can protect up to 60% of your income, while enjoying the peace of mind that your coverage won’t affect your taxes when the payout is received.

What Contractor Mortgage Solutions Can Do for You

At Contractor Mortgage Solutions, we understand the unique needs of contractors, and we are committed to helping you find the best Income Protection policy. Here’s how we can assist:

1. Assessing Your Needs: Our experts will assess your income level, health status, and career stability to recommend the ideal protection.
2. Comparing Providers: We compare a range of providers to help you choose a policy that offers the most competitive premiums and best coverage.
3. Application Support: Our team will guide you through the application process to ensure you understand the policy terms and conditions, and that your application is successful.
4. Ongoing Support: Should you need to make a claim, our team is here to offer continuous support, making the process as stress-free as possible.

Next Steps: Get Started with Income Protection

To secure your Income Protection policy, or for more information, contact Contractor Mortgage Solutions today. We’ll work closely with you to ensure your policy meets your unique contracting needs and gives you the security you deserve.