Income Protection Insurance For Contractors

How Does Contractor Income Protection Insurance Work?

Just like personal Income Protection, Income Protection for Contractors, pays out a monthly benefit if the policy holder is unable to work due to accident or sickness. This benefit is designed to then cover monthly outgoings such as:

• Mortgage / rent
• Food
• Household bills
• Loans / credit cards.

There is however one distinct difference between the two, and that is how the policy is paid for. Rather than you paying for the premiums out of your own bank account, you can pay for them through your limited company.

This has advantages as it can offer significant tax savings, we discuss this in more detail later.

What Does Contractor Income Protection Cover?

Under the ‘own occupation’ definition of incapacity, Income Protection will cover you for anything that medically prevents you from doing your specific job. There are very few standard exclusions on a policy. However, many providers limit claims resulting from:

• Self-inflicted injuries
• Drug or alcohol misuse / abuse
• Travel to a country with political instability, internal conflict, or an active epidemic that the Foreign Office has advised against.

Other than these exclusions, coverage is determined by your pre-existing medical history.

Does It Cover Pre-Existing Health Conditions?

It depends on the health condition, its severity and whether you’ve suffered with it in the last 5 years. Any conditions need to be declared when applying for Contractor Income Protection insurance.

Each insurer has its own view on pre-existing conditions, and is likely to do one of the following:

• Cover the medical condition on standard terms
• Include the medical condition for an increased premium
• Exclude the medical condition altogether.

If a condition is excluded by your insurer, it may be reviewed after a certain period. This is only if you haven’t received any advice, medication, or treatment for said condition. But it’s entirely down to the insurer’s discretion.

At Drewberry™, we have direct access to UK insurers, putting us in a great position to get you the most competitive terms on your policy.

If you need any help please do not hesitate to pop us a call on 02084327333 or email help@drewberry.co.uk.

Samantha Haffenden-Angear
Independent Protection Adviser

What To Consider When Taking Out Contractors Income Protection

Like with any type of insurance, there are a number of factors that you need to consider when taking out a policy. It’s no different with Contractor Income Protection. We’ve put some of the key considerations below.

Benefit Amount Needed

One of the most important considerations when taking out a policy, is how much cover you need. With Income Protection it is possible to cover between 50- 80% of your gross (pre-tax) salary.

The benefit amount you need, will depend on your personal circumstances. It can be tempting to opt for the maximum cover, however this will end up being more expensive. The best thing to do is consider your core outgoings first and align your benefit with them.

Length Of Deferral Period

A deferral period is the set amount of time between you making a claim and your benefit amount being paid out. These can range from 1 day to 52 weeks. If you do have savings and can afford to opt for a longer deferred period, it’s worth considering as it will bring your premiums down.

Payout Length

It’s also important to think about how long you would want your benefit amount to pay out for. Many insurers offer short and long term policies.

Short-term plans, will only pay you a monthly income for 1, 2 or 5 years, whereas a long term policy will continue paying out until you are well enough to return to work, or to the end of your policy.

Policy Cease Age

This refers to how old you’ll be at the end of the policy. Most people align it with their planned retirement date. Many providers will allow you to take out cover that lasts all the way up to age 70, but this will significantly increase premiums compared to a policy that ends at age 65 or even age 60, so consider this carefully.

Premium Type

With an income protection policy, there are three main types of premiums you can choose from:

• Reviewable premiums
  The insurer is able to ‘review’ these premiums as they see fit. Your premiums may increase in a year due to the number of claims made, for example. This makes it hard to know what you’ll pay each year for cover
• Age-banded premiums
  These premiums will also increase over time. Unlike reviewable options, these can only increase by a percentage and to reflect the greater risk of claims as you age. This means you’ll know exactly what you’ll pay each year. Premiums tend to start out cheaper
• Guaranteed premiums
  Guaranteed premiums cannot change over time. Your premium is fixed from the outset of the policy. While they start out more expensive than age-banded, they often work out cheaper during a long-term policy as they can’t rise over time.

Your Definition of Incapacity

Definitions of incapacity determine how unwell you need to be to make a claim. ‘Own Occupation’ is the best type. The most difficult one to claim on is the ‘Any Occupation / Work Tasks’ definition.

These are three definitions an insurer may use:

• Own Occupation Cover
  This means you’ll get your benefits as long as your injury or illness prevents you from doing your specific work duties. For example, a contractor who runs an architecture business and injures their hand wouldn’t be able to complete technical drawings, and could make a claim.
• Suited Occupation
  To claim suited occupation, you must be unable to do your current job or any other role where you have experience or skills. An architect with a hand injury might not be able to do their job but may have the skills and experience for another. In this case, they would most likely not be able to claim under suited occupation.
• Any Occupation / Work Tasks
  You can only claim if you reach a level of ‘unfit to work’ that makes you unable to work in any job or perform a set number of tasks in basic roles. This is the most difficult incapacity definition to claim on. We recommend that clients avoid this.

Should I Link My Policy To Inflation?

When you take out a long-term policy, you’re at risk of the payout being consumed by inflation. If you index link the policy, your insurer will write to you yearly to explain the cost increases of goods and services (known as the Retail Prices Index).

They will allow you to increase the benefit by the same amount to maintain pace with inflation. But this means your benefit and premiums will rise to take into account the higher benefit.

Covering Dividend Payments

Many contractors pay themselves a small salary. They then top the rest up with dividends to maximise tax efficiency. To cover dividends, you must be actively contributing to the success of your company. This is either as part of a team or as the sole employee.

If you are a director of your own business, many insurers will allow you to cover this payment. In other words, the dividend must be paid to you in lieu of salary for work undertaken.

Be cautious if your income rises and falls as you win and complete contracts. Some insurers will base the maximum amount of cover on an average of the last 3 years of earnings.

Others will base it on earnings over the previous 12 months. This can make a big difference when it comes to a claim.

Rauri Taylor
Independent Protection Adviser

Do I Need Contractor Income Protection Insurance?

Whether or not you need protection is down to your own personal circumstances. However putting a policy in place can provide financial security if you’re unable to work due to accident or sickness.

Why Take Out Contractor Sickness Insurance?

None of us want to think about becoming unwell or getting injured, but there are no guarantees. And although we can’t predict the future, we can prepare for it.

• 1 in 5 employees said they wouldn’t be able to save more than a week on savings.
• Considering the average household weekly expenditure is £481.50, little to no savings will cause financial hardship
• Employment & Support Allowance for those off work due to sickness is a maximum of £84.80 per week if you’re aged 25+
• Other government benefits depend on the severity of your disability but are rarely enough to cover expenditure
• More than 2.5 million people were ‘economically inactive’ due to long-term sickness in summer 2022.

Could You Rely On Savings Or State Benefits?

As well as managing the risks of becoming unwell, it’s important to think about how you would cope financially if you were unable to work. Do you have savings to fall back on? How long would they last for? Could you cope on State Benefits?

Why Self-Employed Finance Blogger, Mrs Mummypenny Took Out Income Protection…

Being protection experts, we know how important it is to put cover in place, but don’t take our word for it. We caught up with the award winning finance blogger ‘Mrs Mummypenny’ to she why she took out Income Protection. Take a look 👀

How Much Does Contractor Income Protection Cost?

How much your cover costs will depend on your own personal circumstances. However, there are certain policy and personal factors that will impact what you pay.  We’ve outlined these below and provided example quotes. These are based on:

• A healthy office-based contractor
• A benefit of £2,000 a month
• 4 week deferral period
• Long-term cover and cease age of 65
• Guaranteed premiums.

Provider

Each provider has their own view on risk, because of this they will charge different premiums. When looking at cover its always best to compare providers. You could have 2 very similar policies but one provider charge more than the other due to different risk appetites.

Provider
£49.22	£53.28

Quotes correct as of Feb 2024

Age

Age is another factor that will impact your premiums. Unfortunately, the older we get the more susceptible we become to illness. As a result premiums will increase with age.

Deferred Period

As mentioned, the deferred period is the amount of time between you making a claim and your benefit amount being paid. The longer the deferred period you choose the cheaper your premiums will be.

Smoker Status

It will come as no surprise that some insurers will increase the cost of premiums for smokers. This is due to the associated health risks that come with smoking.

Medical History

Your medical history will also play a part in how much you pay. If you suffer from a pre-existing condition insurers may choose to increase your premiums. Or, they may exclude the condition from your policy all together.

Occupation

If you have a job which is deemed as higher risk, your premiums may be bumped up. This is because certain occupations, such as scaffolders and builders, are at a higher risk of needing time off work due to accident and injury.

Making A Contractor Income Protection Claim

To make a claim on your policy, you’ll need to contact your income protection provider’s claims team. Instructions on how to do so are usually included in your policy documents.

You will need to supply your insurer with a completed claims form and evidence of your condition. A note from your GP should suffice.

Online or via post are the typical methods of submitting a claim. But it’s becoming increasingly possible to make claims over the phone.

Receiving A Payout

Once your claim is approved by the provider, you will need to wait out your set deferred period.

If you still can’t work after this period, then you’ll begin receiving a monthly income to replace your lost wages.

You’ll receive this until either:

• Your payout period expires (short-term policies)
• You’re well enough to return to work, or
• You retire if you can never work again (long-term policies).

Neil’s Cancer Claim With British Friendly

Neil is a client of Drewberry who took out an income protection policy with British Friendly. He was a member for 4 years before he needed to claim.

Unfortunately, he became unwell and had pains in his stomach. After seeing his GP and having further tests, Neil was diagnosed with stage 2 Bowel Cancer. He then needed to make a claim. Find Out More About Neil’s Claim 👇

How Is Contractor Sick Pay Insurance Taxed?

If you pay for income protection insurance through your limited company, it’s taxed differently from a personal plan. While payouts from a personal policy are tax free, a limited company policy differs.

Company Paid Premiums Results In Taxable Claims

As tax relief is available on premiums for a contractor policy, you’ve not paid any tax on those premiums. Tax is then due on the benefit instead.

This is why you’re permitted to insure more of your gross income—up to 80%—with contractor income protection. You need to take into account the fact that tax is taken at the source before you see the benefit.

The tax relief goes into your limited company. It is up to you and your accountant to distribute it from there in a tax-efficient manner.

Is Contractor Income Protection A P11D / Benefit In Kind?

Another benefit of the company owning the cover is it’s not usually classed as a P11D or benefit in kind. HMRC sees it as an allowable business expense, so the premiums are deducted from your corporation tax bill.

Providing Income Protection Cover To Employees

If you’re looking to extend your income protection to other co-directors or employees, Group Income Protection is a good idea.

This works in a similar way to contractor income protection policies. Except it’s a single policy that covers multiple people, rather than one person.

If an employee covered by the policy gets ill or injured, the insurer will pay out their benefits to the company. This will be delivered to the employee in the same way they receive their salary.

Group policies usually need at least five employees to be covered. Terms, cost and cover can be quite different depending on the insurer, group size, and your employees’ circumstances.

If you’re looking to include staff on your policy, it’s best to speak to one of our financial experts who can talk you through your options.

Please don’t hesitate to pop us a call on 02084327333 or email us at help@drewberry.co.uk.

Nadeem Farid
Head of Health & Wellbeing Benefits at Drewberry

Compare Best UK Contractor Income Protection Providers In 2024

There are a variety of income protection policies available in the UK. But only a limited number of providers offer company-paid policies.

Here are the three major insurers offering executive income protection for contractors:

• Aegon
• Legal & General
• Liverpool Victoria.

In some circumstances an executive policy might not make sense. Some contractors choose to take out a personal policy which is paid from their net pay.

Read our complete reviews of each of the income protection providers below. It might also be useful to read our comprehensive guide to the best income protection policies in the UK.

Get Contractor Sickness Insurance Quotes & Expert Advice

With contractor income protection, it’s a little more complicated than a personal policy because of how it’s taxed. To ensure you get it right, it’s worth speaking to an expert.

If you need any help with choosing the right income protection policy for you, please don’t hesitate to pop us a call on 02084327333 or email us at help@drewberry.co.uk.

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We all deserve a first class service when it comes to issues as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.

• There is no fee for our service
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