Life as a contractor can be great. You’re in charge of who you work with, what you do and when you do it. But there are downsides as you don’t get to enjoy the same benefits as those in employment. These benefits include the likes of sick pay and a guaranteed income for the future.
Luckily, there are ways to protect yourself as a contractor with options such as income protection available. Read on as we discuss everything there is to know about contractor income protection.
What is contractor income protection?
Employees can make use of three months’ pay should they be too ill to work or have an accident. Contractors simply do not have this benefit. They are therefore under the threat of financial loss should they be unable to complete any contracted work.
As a result of this, income protection has been created to provide a safety net that doesn’t require paying back like a loan. The policies ensure that should you be affected by illness, you’ll still be able to preserve the same stand of living. They normally operate by a contractor paying in a monthly fee.
How does income protection work?
After a custom waiting period, income protection for contractors can replace a large sum of income. It acts like an insurance plan where you are happy to support yourself until a crisis strikes. You can then access money to aid yourself through a period of turmoil.
Often, if you elongate the waiting period, the premium for a plan will reduce. However, it does leave you exposed to a potential financial threat during that period. The typical waiting periods are normally between 4 weeks through to a whole year.
A longer waiting period would be perfect for those who have already have savings. But, if you have little funds in a savings account, there are options to take an initial short-term plan but move to a longer period once you have savings to rely on.
How much income should you protect?
The average payout is based on a percentage of the total income over a year. Anywhere between 50%-70% is the usual choice for contractors, but some prefer the safety of going higher.
Other options include having a higher percentage for an initial payout while choosing a lower percentage for the following payouts. It’s also worth bearing in mind that contractor income protection is tax-free.
How to choose your income protection payout amount
When you explore your options, it’s important to be realistic about how much you would need should you be unable to work. Consider where you can cut back on things such as petrol and food, but take into account the necessities such as rent, mortgage payments or bills.
It’s also imperative that you accommodate for health requirements such as care and medicines. The secured amount must be enough to ensure you can get back to good health without any added financial stress.
How much does income protection for contractors cost?
The costs involved very much depend on the level of your current health. For example, if you smoke, you are more likely to get ill and will, therefore, face a higher premium. Alternatively, if you have had illnesses in the past, or have significant hereditary health issues, prices can increase.
Other factors that can affect the cost include the work you carry out. Most jobs are split into groups. Office-based workers are normally considered class 1 while class 2 are slightly more active, but not under daily threat. Class 3 are skilled manual workers and class 4 are heavy manual workers. The riskier the job role, the higher the premium.
When do contractors’ income protection payout?
Once the pre-agreed period has passed, you will be able to use your income protection. If you want to access your payout, you’ll have to check that your requirement matches with your insurance’s definition of ‘unable to work’.
They’ll then transfer the money based on activities of ‘daily living’, ‘suited occupation’ or ‘own occupation’. These terms will define when you receive your pay.
Other types of protection to consider
For contractors, income protection isn’t the only option available. Alongside the general insurances contractors should take out, life insurance is a popular alternative as it can provide any dependents with monetary support should you become ill and pass away. This is a primary choice for those with children.
If you have become ill or are concerned about your health for the future, it is recommended that you consider critical illness insurance. This will provide you with a tax-free lump sum of money upon diagnosis, enabling you to live comfortably without the need to working.
Short term income insurance can also be a good option for those who aren’t necessarily ill but are unable to work for a short period of time. This can include those with dependants who may require short term care. The cover will take care of essential outgoings, providing enough to live off of for one or two months.
Can you get income protection with umbrella companies?
For contractors, umbrella companies are a popular choice. They can take care of the daily admin required of contractors. This includes things such as invoices, keeping timesheets and making/paying all tax and NI deductions. But umbrella schemes do offer plenty of additional benefits.
In some cases, this includes contractor income protection, depending on the umbrella company in question. This means that contractors who work with umbrella companies will have fewer monetary worries.
