Contractor Income Protection Insurance
Income protection insurance for contractors in the UK.
Black Lion - Part of Movo H & L
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Why is Income Protection so Important for Contractors?
Unlike traditional employees, self-employed contractors do not receive benefits such as enhanced sick pay. Unless contractors have income protection or accident & sickness insurance they may be vulnerable to the financial impacts that an illness or injury can cause.
Income protection insurance can help provide financial certainty with a monthly payment during periods of illness or injury. This typically covers up to 70% of the contractor’s income and can help meet essential financial obligations such as mortgage payments, utility bills, and daily living costs.
The monthly benefit can continue until the contractor is well enough to return to work or the benefit period comes to an end.
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Considerations for Contractors
In the UK, there are various types of income protection insurance that may be suitable for contractors. Policies can be customised to better meet an individual’s needs, although this can make the decision process somewhat confusing. Therefore it is a good idea to speak with an FCA approved insurance broker able to provide personalised, specialist advice.
For contractors there are two fundamental considerations it can help to look at first:
1. Self-Employed Status of Contractor: Whether the contractor is operating within a limited company, as a sole trader, or as a subcontractor under the Construction Industry Scheme (CIS).
2. Contractor’s Occupation: The type of work undertaken, the risks involved and the primary scenarios the contractor wishes to offset.
Self-Employed Status of Contractor
Limited Company Directors
Contractors with their own limited company through which they invoice their clients are likely to pay themselves a salary and dividends. There are some income protection policies which can be paid for by the company and some that may even cover a percentage of dividends subject to the policy’s terms. This type of insurance is commonly referred to as Executive Income Protection. If a substantial level of a contractor’s overall income comes from dividend payments, then this option should be explored. Please note that insurers offering this may only extend cover to dividends where it can be shown that they have been paid at regular intervals over a period of time. HMRC usually considers income protection insurance a legitimate business expense for limited companies provided that they are wholly and exclusively for business purposes. Where this is the case, the company can offset premiums against its corporation tax bill. However, this also means that in the event of a valid claim, any monetary benefit is incoming revenue to the company and would be taxed accordingly. Whilst Executive Income Protection Insurance may be a viable option, it may also be that a more suitable or affordable policy can be taken out by the individual themselves.Sole Traders
Income protection insurance can not be deducted as a viable business expense for sole traders. Since sole traders operate their businesses as individuals, an income protection policy must be paid for by the individual. This also means that any payout from the policy will not be subject to income tax or national insurance and essentially is tax-free.Subcontractors under CIS
Like Sole Traders, subcontractors working under HMRC’s Construction Industry Scheme will have to take out a personal income protection policy.Contractor’s Occupation
UK Contractors work in a wide range of occupations and across many different industries. For the purpose of simplicity, breaking these down into two categories can help to identify the different factors when considering suitable types of income protection to meet an individual’s needs and budget.
Office-Based Contractors
Occupations: IT, Marketing, Human Resources, Management Consultants etc Profile: Typically work in a low-risk environment although may be exposed to high levels of stress. Their primary concern is often the risk of long-term illness rather than physical injury. Popular Policy Types: Long-term income protection insurance which provides cover up until retirement age and includes cover for mental health issues. Policies can be made more affordable by increasing the “deferred period” (the amount of time the policyholder is incapacitated before the monthly benefit begins). Since issues that prevent the contractor from working in the long-term are of higher concern than short-term illnesses, increasing the deferred period can be one way to obtain affordable, long-term cover. Long-term policies generally require full medical history disclosure. Pre-existing medical conditions may sometimes be covered depending on various factors although this should be ascertained prior to the creation of any insurance policy.
Construction Industry Contractors
Occupations: Bricklayers, Carpenters, Electricians, Plasterers, Plumbers, Roofers Site Managers, Scaffolders etc. Profile: Work in high-risk environments which may involve operating machinery or exposure to potentially hazardous conditions. Physically demanding work means primary concern is often injuries that could prevent them from working for extended periods of time. Popular Policy Types: Accident Only Insurance for Construction Workers may be an affordable and suitable option for those only wishing to protect themselves from the financial consequences that a physical injury may cause. Since this type of policy is focused on accidents and injuries and does not cover illnesses, medical questions may not feature as part of the application. Contractors who also wish to offset the risk of illness may find an Accident & Sickness policy (see below) provides greater coverage at an affordable price. Many policies can be customised in ways that can reduce the cost of the monthly premium. However, because of the increased occupational risk, a long-term income protection policy which provides cover up until retirement age can sometimes be prohibitively expensive for contractors in construction.Occupational Risk & Recovery
Occupational risk is a key factor for insurance providers when determining the price of a policy. This expected recovery time for common physical injuries may also be a contributing pricing factor for those with jobs which are at all physically demanding. For example, where as a broken leg may only prevent an office-based contractor from working for a few weeks, the same injury could force a construction worker or lorry driver off work for several months. This means that a contractor working in the construction industry could have a much higher premium compared to an otherwise identical individual working as an office-based contractor. Therefore, some products may be more suited to the needs and budgets of contractors working in construction.Accident & Sickness Insurance for Contractors
For contractors seeking short-term financial security in the event of illness or injury, Accident & Sickness Insurance may be a viable alternative. Both policies pay a monthly benefit, often up to 70% of gross income. However, Accident & Sickness policies can have a lower cap, often around £2,500 per month. Additionally, whereas standard income protection policies can pay a monthly benefit up until retirement, Accident & Sickness policies generally have a maximum benefit period of 24 months. They are designed to help contractors meet essential financial commitments while they recover, but do not provide a long-term replacement income if the policyholder is permanently incapacitated.Benefits of Short-Term Policies
- Cheaper premiums: As a short-term solution, Accident & Sickness policies generally have lower premiums compared to long-term income protection.
- Simpler application process: With less medical underwriting, obtaining cover can be much quicker and more straightforward.
Considerations for Contractors
To determine whether Accident & Sickness Insurance is a suitable option, contractors may wish to consider:- Financial sufficiency: Would a maximum monthly benefit of £2,500 for up to two years be enough to cover essential outgoings? If not, a long-term income protection policy may be more suitable.
- Occupation: Does their profession rely heavily on their health and physical ability? How long would common injuries prevent them from working? Are there many illnesses or injuries that can prevent them from working entirely?
- Career investment: If years of study and training have been invested into their profession, a more comprehensive income protection policy may better safeguard their career and future earnings.
Accident & Sickness vs Income Protection
For a more in-depth comparison of how different policy types may suit the needs of Construction and IT Contractors, please see What’s the difference Accident & Sickness and Income Protection?Tips on Income Protection Policy Options
Once contractors have considered their occupation and self-employed status, the standard policy options should be given some good thought. There are various policy options which can be set to meet an individual’s needs. These have a direct effect on the price, so fine-tuning these can help contractors obtain a quote that provides a suitable level of cover within their budget.
Deferred Period
A policy with a 30 day deferred period means the insured contractor has to be incapacitated for 30 days before the monthly benefit will begin to be made. However, the same policy with a 90 day deferred period is likely to have much lower premiums, sometimes perhaps up to 50% less.
Monthly Benefit Amount
Calculate monthly expenses and choose a benefit amount that will cover these costs. Ensure the amount provides adequate financial support but consider that the higher the monthly benefit, the higher the premiums.
Benefit Period
The length of time a policy will continue to pay the monthly benefit is often referred to as the “Benefit Period”. Short-term income protection or accident & sickness policies may have a period of just 12 or 24 months. Long-term policies can provide coverage right up until retirement. Short-term policies generally have lower premiums and can provide adequate peace of mind to those looking to protect themselves against physical injuries and illnesses from which they will recover. However, contractors who are looking for a policy that will protect them for long-term, career-ending illnesses are likely to prefer a benefit period that will take them up to retirement.
Incapacity Level
A very important consideration for contractors is the incapacity level offered by any policy. This part of the policy defines how ill or injured the policyholder must be in order to make a valid claim. An “Own Occupation” policy should provide coverage if the policyholder can not perform crucial aspects of their own occupation. Cheaper policy types such as “Suited Occupation” may see claims rejected if the ill or injured person is still capable of doing similar jobs or even those they are equally qualified to do. Since contractors are normally relied upon for specific skills and experience, own occupation policies tend to be their preferred choice.
Policy Features
Some policies may offer additional benefits, such as rehabilitation support, mental health coverage, and access to online health services. In many cases some of these policy features may come as standard. However, some insurers may offer these as additional, premium features. Understanding what additional features are provided in any policy is important especially when making a decision between two or more quotes.Making an Informed Decision
By carefully considering specific needs and consulting with professionals, contractors can select an income protection policy that provides robust coverage and peace of mind. Income protection is a critical investment in financial stability, offering security against the uncertainties of contracting work.Why Choose Black Lion Insurance?
Black Lion Insurance offers a comprehensive selection of policies from the UK’s top insurers, ensuring that contractors receive tailored advice and coverage. With expertise focused on the insurance needs of the self-employed, Black Lion Insurance understand the unique challenges faced and can help find the most suitable policies to meet the requirements of contractors.FAQs
What’s best for a contractor, Income Protection Insurance or Critical Illness Cover?
Contractor’s should consider that these are two different types of insurance policy. Whether one policy is better for any individual can really only be determined on a case-by-case basis.
Income protection cover will pay a monthly benefit to replace up to 70% of lost income in the event that the policyholder is unable to work due to illness or injury. Most policies do not list qualifying illnesses or injuries; instead, the emphasis is on whether the issue is incapacitating the policyholder. The monthly benefit continues until either the contractor is able to return to work or the cover period ends. Cover can last up until retirement age and multiple claims can be made over the course of a policy’s term.
Critical Illness will make a lump-sum payment in the event that the policyholder is diagnosed with one of the medical conditions specified in the policy. Typically these include certain types of cancer, heart-attack, stroke, terminal illnesses and illnesses which cause permanent disability or loss of senses. Comparatively, the list of medical conditions is narrow versus income protection, and more treatable forms of cancer are likely to have reached a certain severity in order to make a valid claim.
Contractors may wish to consider that critical illness insurance isn’t intended to pay out on many of the most common issues that can cause long-term absence from work.
It is always advisable to speak with a regulated insurance broker with specialist knowledge of both policy types.
