Income Protection Insurance for Contractors: Choosing the Right Policy

As a contractor, you're no stranger to uncertainty and risk. Your income can be affected by factors like changes in market demand, client cancellations, and even your own health issues.

Contractors are often self-employed, which means they don't have the same benefits as employees, such as sick pay or a guaranteed income. This can make it difficult to cover expenses if you're unable to work due to illness or injury.

Income protection insurance can help mitigate this risk by providing a financial safety net in case you're unable to work. It's a type of insurance that replaces a portion of your income if you're unable to work due to illness or injury.

By choosing the right policy, you can ensure that you're protected in case something unexpected happens.

Income protection insurance is a type of sickness insurance that pays out a monthly benefit if you become too ill or injured to work.

This type of insurance is designed to protect your outgoings, such as your mortgage, rent, utilities and groceries, when you're unable to work. Executive Income Protection policy premiums are usually tax-deductible, making it a tax-efficient way to get income protection insurance.

Self-employed income protection insurance provides a monthly income if you’re unable to work due to accident or illness. The benefit payments are designed to cover your core monthly outgoings, such as rent/mortgage, household bills and childcare costs.

Typically, a policy will pay a tax-free monthly benefit if you ever can’t work through illness or injury, and protect up to 70% of your gross (pre-tax) income. You can also take out coverage to maintain your standard of living, rather than just the essentials.

Income protection is a type of insurance that provides a monthly benefit of up to 70% of your income for a set amount of time (known as a benefit period) if you’re unable to work due to injury or illness.

The benefits of income protection insurance are particularly useful for self-employed people and small business owners, as they may not have access to workplace benefits like annual leave and sick leave.

Here are some key benefits of income protection insurance:

You can cover up to 80% of your monthly income, including your salary, dividend drawdown, pension, and National Insurance contributions, with a contractor income protection policy.

HMRC usually sees it as an allowable business expense, meaning premium payments come from your corporation tax bill. This can be a significant tax benefit for self-employed contractors.

You can opt for a policy which will pay out after four weeks of injury or illness (deferred period).

Here are some key policy features to consider:

You can cover up to 80% of your monthly income, including your salary, dividend drawdown, pension and National Insurance contributions, with a contractor income protection policy.

There are typically very few limitations to what is covered by a contractor's income protection policy, but insurers may offer differing "definitions of incapacity" that can affect your cover.

You can opt for a policy which will pay out after four weeks of injury or illness (deferred period), allowing you to receive benefits as soon as you need them.

You can protect your income up until your expected retirement age with a contractor income protection policy.

HMRC usually sees it as an allowable business expense, meaning premium payments come from your corporation tax bill.

A contractor income protection policy can pay out to cover your partner's dividend drawdown, as long as they are non-profit making and wouldn't be able to create income for the business while you were unable to work.

Here are some key benefits of contractor income protection policies:

Contractor policy costs can be affected by a range of factors.

Your age is a significant factor, with premiums increasing as you get older. For example, a 20-year-old contractor can expect to pay £22.92 per month, while a 50-year-old contractor's premiums will be £78.19 per month.

The type of policy you choose can also impact the cost. For instance, if you operate through your own limited company, you can opt for Executive Income Protection, where your company pays your premiums through your business account.

Some factors outside of your control can also affect the cost. Insurers will offer differing "definitions of incapacity", which can impact the level of cover you receive.

The cost of contractor income protection policies can vary depending on your individual circumstances. A non-smoker, office-based contractor with a 3-month deferred period can expect to pay around £2,500 a month.

Here are some estimated premiums based on different ages:

The cost of your policy will also depend on the provider you choose and your policy options. It's essential to understand the specifics of your policy to ensure you're getting the right level of cover for your circumstances.

Setting up a contractor protection policy requires careful consideration to ensure you have the right level of cover.

It's essential to speak to a specialist, like a partner at Sandbourne, as they'll guide you through configuring your income protection policy and choosing the best insurer for your circumstances.

You should understand that a contractor's income protection policy is designed to pay out if you're unable to work due to illness or injury.

There are typically very few limitations to this type of policy, but insurers may offer differing "definitions of incapacity" that can affect your cover.

It's crucial to understand what this means and how it can impact your policy.

A specialist can help you navigate these definitions and ensure you have the right level of protection.

Making a claim is a crucial part of income protection insurance for contractors. You can make a claim by contacting your insurer's dedicated claims team, whose contact details can be found in your policy documentation.

To initiate the claims process, you'll need to complete a claims form and provide evidence of your medical condition, such as a note from your GP. This is usually a straightforward process.

Your insurer will assess the medical and financial evidence to approve or reject your claim. It's essential to be honest and provide all necessary information to avoid any potential issues.

If your claim is approved, you'll start receiving a monthly payment instead of your wages, which will continue until one of the following happens: your payment period expires, you're well enough to return to work, or you reach retirement age.

Here are the key milestones in the claims process:

Keep in mind that the length of your policy payout period will impact the cost of your insurance, so it's essential to choose a policy that meets your needs. Short-term policies typically pay out for between 1-5 years per claim, while longer-term policies can protect you until retirement.

Contractor income protection insurance can be a valuable investment, but it's essential to understand the costs involved. A benefit of £2,500 a month is a common starting point for many contractors.

You can expect to pay a premium for this level of coverage, but the exact cost is difficult to pinpoint due to individual circumstances varying greatly. Still, we can look at some rough estimates based on pre-selected criteria.

For instance, assuming a non-smoker, office-based contractor with a 3-month deferred period, and a plan expiry at 68, the premium is guaranteed for the life of the policy. This means your payments will remain the same over time.

The maximum income protection benefit for contractors is 80% of their income, including salary and dividends. This is a unique aspect of income protection insurance for contractors, allowing you to cover your business income in a way that's not typically possible with other types of insurance.

If your partner also draws dividends from the business, you can include their income in the policy, as long as they're in a non-profit making role. This is a valuable consideration for many contractors who run their businesses alongside a partner.

The cost of income protection insurance can be a bit tricky to understand, but don't worry, I'm here to break it down for you.

The cost of contractor income protection varies greatly depending on individual circumstances, but we can look at some rough figures based on pre-selected criteria. For example, if you want a benefit of £2,500 a month, are not in ill health, and are an office-based contractor or company director, your premium might be around £22.92 per month if you're 20 years old.

Your premium will increase as you get older, with a 40-year-old paying around £54.41 per month, and a 50-year-old paying around £78.19 per month.

There are several factors that affect the cost of your income protection premiums, including whether you smoke, your pastimes, your health and lifestyle, family medical history, occupation, gender, and age.

You'll also have to choose between a reviewable premium, which allows the insurer to review the premium at regular intervals, and a guaranteed premium, which means you know your price in the future.

Here are some pros and cons of each type of premium to consider:

Ultimately, the best option for you will depend on your individual circumstances and preferences.

Income Protection Insurance can be a great benefit for self-employed individuals, but is it considered a taxable benefit by HMRC? Fortunately, the good news is that Income Protection isn't classed as a P11D/Benefit In Kind, so you won't have to pay additional tax on it.

This means that if your company is paying for your Income Protection, you won't have to worry about it being taxed as a benefit in kind.

Incapacity definitions can be complex, but understanding them is crucial when it comes to income protection insurance for contractors.

Insurers use three definitions of incapacity, which determine how unwell you need to be to make a claim. These definitions are ranked from best to worst.

The three definitions you'll encounter are:

The Own Occupation definition is the most comprehensive and specific protection, ensuring you're eligible for support if you're unable to perform in your specific professional role due to illness or injury.

The Any Occupation / Work Tasks definition is the most restrictive, providing very little protection against all but the most severe illnesses and injuries. It's usually not recommended.

It's essential to understand the definition of incapacity used on your policy, as it will also be crucial in determining the price of your policy.

Health conditions and pre-existing conditions can be a concern when it comes to income protection insurance for contractors.

You'll need to declare any health issues you've had in the past five years, and the insurer will decide how to treat them. They might load the policy, exclude the condition, or offer a date to review the exclusion.

The insurer will ask you to declare any existing medical conditions when setting up your income protection policy. They'll consider the severity of the condition and decide whether to cover it on standard terms, for an additional premium, or exclude it entirely.

The most common reasons for claiming on an income protection insurance policy include musculoskeletal injuries, fractures, cancer, mental health issues, and COVID-19.

As a contractor, it's essential to understand what's not included in your income protection insurance. Some standard exclusions that insurers have in place may limit your claims.

Drug or alcohol misuse and self-inflicted injuries are not covered by income protection insurance. This means that if you're unable to work due to these reasons, you won't be able to make a claim.

Travel to a country with political instability, internal conflict, or an active epidemic can also lead to exclusions. So, if you're planning to travel to such areas, make sure you're aware of the potential risks.

Here's a quick rundown of the exclusions to keep in mind:

Pre-existing medical conditions are another significant factor to consider. We'll cover this topic in more detail later, but it's essential to understand that pre-existing conditions may not be covered by your income protection insurance.

Health conditions can be a major concern when it comes to income protection insurance. Any health issues you've suffered from in the past five years need to be declared, and depending on how the provider treats them, your premiums could be higher.

You might be wondering if you'll be able to get cover for a pre-existing condition. The good news is that insurers will consider covering your condition, but the outcome depends on the severity of the condition. Here are some possible outcomes:

In 2021, leading provider LV= found that the most common reasons for claiming on an income protection insurance policy included musculoskeletal injuries, fractures, cancer, mental health issues, and COVID-19.

As a contractor, it's essential to consider the tax implications of income protection insurance. The premiums you pay for income protection insurance are tax-deductible as a business expense.

HMRC views these premiums as a business expense, allowing you to deduct them from your corporation tax bill. This can help reduce your tax liability.

Tax for self-employed income protection varies depending on how you work and pay for the policy. If you're self-employed, you need to organise your own super contributions, as premiums are taken from your super balance.

You can't claim a tax deduction for your income protection premiums if your policy is through your super fund and your premiums are deducted from your contributions.

Choosing the right policy and provider is crucial when it comes to income protection insurance for contractors.

To get the right level of cover, it's a good idea to speak to a specialist, as they can guide you through the process and help you configure your income protection policy.

Each provider will charge you different premiums, even if the cover is identical, due to their own appetite for risk.

Here's a comparison of two providers' prices:

Income protection insurance is a must-have for self-employed individuals and contractors in the UK, as they typically have no formal sick pay.

According to Which?, income protection insurance is essential for every working adult in the UK.

You may be wondering if income protection policies are worth it, and the answer is yes. Income protection cover is crucial for those who have no formal sick pay, including self-employed individuals and limited company directors.

By having income protection insurance, you can ensure that you can pay your monthly basic expenses on time without relying on others or making lifestyle sacrifices.

Contractor income protection insurance allows small business owners to pay for their policy through their limited company, with numerous benefits and tax advantages.

This means that you can have peace of mind knowing that you're protected financially, even if you're unable to work due to illness or injury.

For self-employed dads in the UK, income protection insurance can be a crucial source of financial help, allowing them to pay their expenses without relying on others.

Each provider will charge you different premiums, even if the cover is pretty much identical, because each will have their own appetite for risk and charge differently based on this.

The first thing to bear in mind is that you should compare the prices of different providers to find the best deal for you.

A provider price comparison is shown below:

This shows that different providers charge different prices for the same level of cover.

As a contractor, you have unique needs when it comes to income protection insurance. You can cover up to 80% of your monthly income, including your salary, dividend drawdown, pension, and National Insurance contributions.

One of the benefits of income protection insurance for contractors is that HMRC usually sees it as an allowable business expense, meaning premium payments come from your corporation tax bill. This can be a big advantage, especially for those who are self-employed.

You can also opt for a policy that will pay out after four weeks of injury or illness (deferred period), which can give you some breathing room while you're recovering.

Here are some key things to keep in mind when it comes to income protection insurance for contractors:

As a contractor, you have unique financial needs that require specialized insurance solutions. You can cover up to 80% of your monthly income, including your salary, dividend drawdown, pension, and National Insurance contributions.

Contractor Income Protection policies can pay out after four weeks of injury or illness, and you can protect your income up until your expected retirement age. HMRC usually sees it as an allowable business expense, meaning premium payments come from your corporation tax bill.

Some jobs involve more risk than others, and manual workers are more likely to have an accident on the job than office workers. This is why those in riskier jobs pay more for their Self-Employed Income Protection Insurance than those in less dangerous roles.

Here are some key facts to keep in mind when considering Contractor Income Protection:

Contractors who work through their own limited company can pay for Income Protection Insurance through their company, making premiums eligible for corporation tax relief. However, HMRC taxes the payout when you make a claim, so it's essential to insure yourself for a higher figure to compensate.

Contractor Costs can add up quickly, but it's essential to prioritize your financial security.

The cost of income protection for self-employed contractors varies significantly with age.

For example, a 20-year-old can expect to pay £22.92 per month for income protection, while a 50-year-old will pay £78.19 per month.

Here's a breakdown of the costs at different ages:

The costs increase with age, so it's crucial to plan ahead and factor these expenses into your business budget.