Why Contractor Income Protection?
Provides you with a tax free monthly income you can rely on should you be too ill or injured to work.
Designed to cover your core monthly financial commitments such as your mortgage/rent, bills and food.
Income Protection is the one protection policy every working adult should consider. Which? Money 2013
Speak to our expert independent advisers or get an instant online quote to compare the UK’s leading insurers.
What does Income Protection cover?
Accident & Sickness
When the ‘Own Occupation’ definition of incapacity is used the policy can payout for any medical condition that prevents you from working in your own specific job role.
As income protection policies do not use a set list of conditions they cover and many insurers do not have any standard exclusions, income protection is the most comprehensive form of accident and sickness protection available.
As a self-employed contractor you are able to cover between 50% and 70% of your profit before tax (sole traders) or salary and dividends (company directors).
How does Income Insurance work?
You cease working due to any accident or sickness which prevents you from completing your job role.
You make a claim with the insurer. (You will need a letter from your doctor and may need to complete a claims form).
The insurer will start to pay a monthly tax free benefit after you have been unable to work for the length of your deferred period.
The policy pays out until either you return to work or reach the maximum payout length, which could range from one year to retirement.
Do I need to protect my income?
When deciding if income protection is worthwhile it makes sense to weigh up the risk of something happening and the potential consequences:
The Incapacity Risk:
1 in 10 people have been unable to work due to illness or injury for +6 months (The Guardian/Unum Survey, 2011).
With government incapacity benefit of only £99.15 per week, someone with a salary of £30,000 would suffer a 77% fall in income.
If you lost your income how would you cover your bills if you didn’t have any contractor protection?
Your Key Options
Choose your level of cover
Depending on the insurer, it is possible to cover anywhere from 50% to 70% of your gross (pre-tax) income.
Choose your deferred period
This is the length of time you would need to be off work before the policy kicks-in and starts paying out. The deferred period can range from 1 week to 12 months.
Choose your payout length
Short-term plans can payout for a maximum of 12 or 24 months and long-term plans can continue paying out until you reach the end of the policy life, which is usually set in-line with your expected retirement age.
Sam was knowledgeable and attentive and spent a long time explaining and working out what Income Protection insurance would be best for me.Elizabeth Owen
What is contractor income protection?
Income protection insurance for contractors and IT consultants will protect your earnings against the financial risk of short-term and long-term sickness and injury. Income protection is designed to pay out a monthly benefit to replace lost earnings during time off work due to an accident or ill health.
It is very common for computer consultants and project managers to be set-up on a self-employed contractor basis either as a director of their own limited company or as a sole trader. As such, there is not usually any sick pay entitlement or employer provided insurance benefits to fall back on should time have to be taken off work due to illness or injury.
In any case, whether employed or self-employed, income protection represents the only real form of long-term earnings protection against the risk of accident and sickness. This type of plan can payout a monthly income either until you are well enough to return to work or you reach the end of the policy term, which is usually set in-line with the age you expect to retire.
Do I need it?
For most individuals it is worth considering taking out some form of sickness insurance, with income protection usually being the most appropriate plan given that cover is based upon earnings and the comprehensive nature of the cover provided.
If you had to cease working for a number of years what impact would that have on personal and family finances? Without sufficient savings or other cover in place a significant and needless financial exposure can arise. State incapacity benefits are very limited in nature and solely relying on these benefits would mean a significant reduction in living standards for most individuals.
It is compulsory for employers to pay statutory sick pay of £81.60 per week to all contracted employees for the first 28 weeks of incapacity, after which the Employment and Support Allowance(ESA) of up to £99.85 per week can be applied for (weekly rates as of April 2011).
If you are employed it is worth double checking that your employer does not provide you with cover under a group scheme as an employee benefit prior to taking out your own plan (if applicable).
How does it work?
David, an IT contractor working with the financial services industry in London, decided to take out an income protection policy after moving into self-employed IT contract work. Upon leaving paid employment David lost a generous employee benefits package including income protection cover and 4 months worth of full sick pay entitlement, and therefore decided to set up his own personal plan.
With just over 3 months worth of savings, David decided to set the policy deferred period at 13 weeks long and decided to insure £3,500 per month (representing 55 per cent of his gross annual salary and dividends).
After 3 years of holding the policy David stared experiencing serious back pain that prevented him from working; he was off work for 4 years whilst undergoing a series of operations and recovering. After seeing out the 13 week deferred period, David received 35 monthly payments from the insurer whilst off work, totalling £122,500.
Getting own occupation cover
IT and computer consultants usually fall within the business consultant risk class, which is the lowest risk class (occupation class one). Job functions in this class usually consist of consulting and programming. Given this, an own occupation incapacity definition is usually available, which means that the plan would payout for practically any medical reason that prevents you from working in your own job.
Some contractors need to undertake a degree of manual work in relation to hardware installation and maintenance. For this type of work an own occupation incapacity definition can still be obtained on your contractors income protection plan but the premiums will be higher as a lower occupation class would need to be used (usually occupation class two).
If you undertake a very large number of business miles each year it is common for insurers to lower the occupation definition used or increase the monthly premiums charged to reflect a higher level of risk. It is important to note that the business mile cut-off point varies considerably from insurer-to-insurer. One insurer has a cut-off point of 15,000 miles whereas another insurer does not have a cut-off point so long as you could still continue working using other modes of transport (such as a taxi or public transport).
Some IT consultants also need to undertake international business travel and this can impact the terms offered depending on the number and length of business trips each year, and the location travelled. If this is appropriate to you it is vital to run through with an adviser.
What are my options?
With most insurers it is possible to insure between 50% and 65% of your gross (pre-tax) personal earnings as a maximum. However, it is important to assess your monthly expenditure to determine how much cover you actually need rather than just looking to insure the maximum allowable.
With a personal plan the monthly premiums are collected from a personal bank account and any payout from the plan would be paid directly to you. As Insurance Premium Tax (IPT) is being paid each month the benefit paid out during a claim would not usually incur income tax.
However, if you are a director of a limited company it may be possible to take out an executive income protection plan which is paid for by your business. With this option it is usually possible to expense the monthly premiums but the payout from the plan would incur income tax, which is why insurers allow up to 80% of gross earnings to be covered with an executive plan.
Setting the deferred period
When taking out an income protection plan you will need to select a deferment period, which is the period of time before the plan starts to accumulate benefit after you cease working due to illness or injury.
As the deferred period is extended the monthly premiums come down significantly so it makes sense to set the deferred period at an appropriate length given any (full) sick pay entitlement you would receive from your employer (if applicable) and relative to the length of time you would have savings sufficient enough to cover your expenditure.
Length of cover
Plans usually have a minimum term length of 5 years and can run all the way up until age 70 with some insurers. It usually makes sense to set the policy termination age equal to the age you expect to retire so the plan would cover earnings throughout your working life.
Naturally, extending the cease age of the policy can increase the monthly premiums significantly as the chances of suffering illness increases vastly between the ages of 55 and 70 years old, which form the highest risk years.
Given the length of these policies it makes sense to consider the option to link your benefit to rises in inflation (as measured by the Retail Price Index). Including this option means that your benefit will increase each year in-line with RPI inflation and therefore the purchasing power of your cover will not be eroded by inflation over time.
With the inflation linking option it is important to note that the monthly premiums will also rise each year with inflation, even if guaranteed premiums are selected. With most insurers the premiums would rise in-line with inflation but a small number of insurers would actually increase the premiums by a greater amount than inflation.
What about unemployment cover?
A limited number of income protection plans allow you to add up to 12 months worth of unemployment protection. With this cover you would receive a monthly income if you were to suffer forced redundancy. Plans do not cover voluntary redundancy or dismissal for poor performance.
It is very important to note that unemployment insurance isn’t appropriate for everyone. Drewberry Insurance does not usually recommend that individuals who are self-employed (either as a company director or sole trader) take out redundancy insurance.
Need some advice
Please feel free to contact us to arrange an IT Consultants Income Protection or Contractors Income Protection plan for yourself. Being an independent insurance intermediary, one of our advisers will be able to run through your specific circumstances and requirements before recommending a suitable plan form our large panel of leading insurers.
If you would like some competing quotes please complete your details in the quote box provided above. On the other hand, if you would like to speak to someone to run through your requirements and policy options then one of our expert advisers would be more than happy to help, just give us a call on 0208 432 7333.
Actual Income Protection Claims
The table below details real life stories of how an income protection policy has saved someone financially following an illness which left them unable to work.
The information is from Liverpool Victoria's 2011 claims, it demonstrates how anyone can lose their income, regardless of age, gender or occupation, LV's youngest claimant in 2011 was just 22 years old.
To provide expert financial advice and deliver a passionate 5-star service to help educate our clients so they can make informed decisions.
To help individuals and businesses throughout the UK to plan their financial future whilst protecting them against the financial risks they may face.
To provide quality financial advice in a transparent, friendly and professional manner.
Occupation Definition Calculator
Make sure your Income Protection covers you in your 'Own Occupation'!
Too often individuals take out income protection without being fully aware of the incapacity definition on which their plan would pay out.
Will the plan pay out if I am unable to do my current job role? Or will it only pay out if I am unable to do any occupation?
If you do not already have income protection this tool should provide you with guidance as to what to look out for and to ensure you do not fall foul of a lesser occupation definition.
Independent Protection Expert at Drewberry Insurance