Guide to Income Protection Insurance for Contractors

Why do contractors need income protection? Well, unlike permanent employees who get sick pay and statutory holiday pay if they need to take periods of time off work, if contractors don’t work they don’t get paid.

What are the key features of income protection for contractors?

• Income protection replaces lost income during period of incapacity such as serious illness or disability
• Pays a monthly income after your chosen waiting period
• Contractors can protect up to 70% of their income
• Freelancer Financials will help you find the policy specific to your needs

How does income protection for contractors work? 

Whilst permanent employees have often the benefit of at least 3 months’ pay in the event of an accident or illness, as a contractor you are exposed to a potential financial loss the first morning that you are unable to arrive at your clients’ site. There are ways to protect yourself in this situation.

You can preserve your current standard of living by paying monthly for an Income Protection plan. These policies will support you financially if you are unable to work for an extended period due to an accident or illness.

We will clear up some of the confusion that surrounds this type of protection and cut through the jargon. For those that already enjoy the protection of this type of cover we provide a free review service to ensure that your current cover is suitable for a contractor and suitable for your own specific circumstances.

Income Protection can replace a large portion of your earnings after a waiting period of your choice – it’s a bit like an excess on home insurance, but instead of this being a monetary amount, it’s a period of time that you’re happy to support yourself before the cover needs to kick in. The longer the waiting period, the cheaper the premium but the longer you must wait before the insurer would start paying you. The defer periods typically range between 4 - 52 weeks. Your Adviser will discuss which period suits your needs best after discussing this in more detail with you.

If you have a ‘rainy day’ fund to pay your bills over the short term, then you may choose to take a longer waiting period to keep the cost down.

A suggestion for contractors who currently have limited access to funds is to take a short waiting period initially but possibly extend this as savings grow.

It is possible to protect up to 70% of your income. Try to be realistic when looking at the figure you would need if you were unwell. Whilst it is fair to say that you may be able to cut back on many areas if necessary, there will be some areas that will come more sharply into focus. To retain a car for mobility, pay for help at home or change your property may be really important. Although this can be depressing subject it is one that needs to be addressed. Comfort in ill health can often be a question of relative financial health and you want to get back to good health without financial worries.

There are multiple Income Protection policy variations on the market but the reality is that so many of these just do not work for contractors or are substandard policies with hidden exclusions.

What do you need to take into consideration when taking out an income protection plan? 

There are many things to think about when choosing the right plan for you, these include: 

• The claims history from the provider
• The provider's financial stability
• What does the provider deem as income
• How will they view your claim if you’re between contracts when you fall ill
• What support will they give you to get back into work when you’re well again

Obviously, cost is very important too, but the provider and product you choose is just as important. If you have a policy which doesn’t pay out when you need it, it is as useless as not having cover at all!

Freelancer Financials will ensure that not only is the policy well priced, but that it is from a provider with an outstanding claims record who understands how you work.

Looking at the potential impact of you never being able to return to work as you know it in the event of a serious illness such as a stroke, you should always ensure that a policy covers you to your planned retirement date.

ContractorUK are not authorised to offer regulated insurance advice. ContractorUK are introducers to Freelancer Financials.

Financial advice is given by Freelancer Financials, which is a trading name of Mortgage Quest Ltd and is regulated and authorised by the Financial Conduct Authority (FCA).  FCA registration number 312484.

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