Contractors need to think about covering themselves with insurance more than most other workers as they have left behind the security and perks of permanent employment for larger companies. The cover that comes with that permanent employment package should not be underestimated, which is why it is essential from the outset that contractors get all their insurance sorted out. Most contractors will rightly invest in the big three insurance types, public liability, professional indemnity and employer’s liability insurance. However, because contractors do not get sick pay and sick leave like workers employed by companies, there is another type of insurance that might be worth considering – income protection insurance. Income protection insurance (or Permanent Health Insurance) is a type of insurance that protects you if a situation arises in which you cannot work for any period of time by giving you a replacement income for that period. In purchasing income protection insurance you are essentially purchasing peace of mind that you won’t fall behind with your mortgage or loans or face a drop in your current lifestyle if a rainy day comes along unexpectedly.
Ok, So How Does Income Protection Insurance Work?
It’s actually very simple. You, as the contractor, take out an insurance policy with a specialist contractor Permanent Health Insurance provider and they agree to pay you a percentage of any lost income if you have an accident that puts you out of work or you cannot work due to ill health. How much that policy costs will depend on the deferred period (the waiting period) you have selected. The deferred period is the length of time that you have to wait while out of work before the policy starts to pay out. Normally, this period will be anything between a month and a year. It is up to you to decide how much time would work for you but obviously the longer you are able to wait for payment, the lower the premiums on your insurance will be. If you opt for the shortest period – 1 month – then you will pay a lot more in premiums but of course you would also be covered a lot quicker in cases of injury or short term illness. On the other hand, if you were only worried about long term illness and had some savings put by you could pay much cheaper premiums but have to wait between 6 months and a year for payment. Those premiums are paid out of your net pay and if you were to make a claim at any point the replacement income would be paid back to you directly without any added taxation issues.
Most permanent health insurers will let you cover yourself for an amount up to 65% of your salary and dividends (gross) and some providers will also include split dividends. As soon as you no longer require cover you can cancel anytime without having to give notice or face penalty charges.
How Do I Choose The Best Income Protection Insurance For Contractors?
With hundreds of different providers out there all offering variations on the same sort of policy, how do you find a policy that is exactly right for you?
The first thing you should do is draw up a list of exactly the features you are looking for from your insurance – the preferred length of the deferred period, the amount you want to pay for premiums, how much income you want to cover etc. When you do all of this, make sure you are realistic about how much income you will actually be needing if disaster strikes. As mentioned above, you are normally allowed to protect up to 65% of your current income, but you might decide to protect less than this in order to reduce those premiums. Ask yourself how much you will actually need to live off if the worst happens and you are out of work for a long period. You will also need to check the policy to make sure that the figures they quote you are inflation proofed. Because of how inflation works, what you think you can live off right now will not necessarily be manageable in 7 to 10 years time. If you want to cover yourself against inflation, make sure the policy you join has something called indexation (also known as escalation) which gives you an incremental increase in the amount insured every year. Also, make sure that your policy covers you up till your date of retirement. That’s because if you are seriously injured you might never be able to return back to work so it is prudent to cover yourself all the way until retirement!
Does Income Protection Insurance Cover Dividends?
Next, you want to ensure that the insurance policy you sign up with covers your dividends too. Most likely you will be using a contractor insurance specialist who will know their way around contractor financials and will understand how your income works. Because a large part of most contractors’ income comes through dividends it is obviously essential that these are covered in any policy.
Is Income Protection Insurance Industry Specific?
You also need to check that the policy will cover you against specifically being unable to work in your particular contracting industry. Why? Because a number of policies will only pay out if you are not able to work in any role, rather than just your contracting role. You absolutely must avoid policies with this clause in them, otherwise, the insurance company could argue that though you cannot work in your contracting role, you could still do some kind of menial labour – and therefore they would not pay you.
Lastly, and most importantly, once you have chosen a company, do your research on them. You need to have confidence that they will do the right thing if you ever need them and not try to wriggle out of it. Before you sign up it is perfectly reasonable to ask the company for some statistics about how often they have paid out in similar circumstances and for instances when they haven’t paid out. Similarly, ask your own financial advisor and your insurance broker what they can tell you about the company and if they have had any experience with them in the past and do your own research on the internet to see how other contractors have reviewed them.