Contractor Income Protection

You can preserve your current standard of living by setting aside a monthly figure towards permanent health insurance (PHI). These policies will support you financially if you are unable to work and can even maintain your standard of living through to retirement if you suffer a more serious illness or accident.

Benefits are tax free when premiums are paid personally or taxable when paid through your company. If your company pays the premiums they are classed as a legitimate business expense and are without benefit in kind costs to you.

We aim to clear up some of the confusion that surrounds this type of protection, cut through the jargon, advise you of the important questions to ask of providers and help you decide what type of cover is best suited to your situation. For those that already enjoy the protection of this type of cover we provide a check list against which to compare your existing policy to ensure that it is up to scratch.

A provider of PHI (typically an insurance company) will replace a part of your income after a waiting period of your choice. You may come a term used to describe this waiting period - the deferred period. Typically the delay before you are eligible to receive benefits will be between 4 weeks and a year, the longer the deferred period the less this protection will cost to provide. Therefore a one-month waiting period will cost more but will cover you for a relatively minor illness or accident that would mean you could not work in the short term, such as a skiing injury.

If you have savings to pay your bills over this shorter term then you may choose to take a longer deferred period and have benefits starting after 3 or 6 months. Although less serious problems are unlikely to trigger a claim you will be protected against the potentially devastating impact of a longer-term illness or more serious accident.

A suggestion for contractors who are short of funds at the moment is to take a short waiting period initially but extend this term after finances improve and you no longer require such immediate protection.

It is possible to protect up to 75% of your income . Try to be realistic when looking at a figure that you will need. Whilst its fair to say that you may be able to cut back on many areas if necessary, there will be some luxuries that develop a significance far greater if you are ill over an extended period. To retain a car for mobility or perhaps subscribe to cable television could become essentials to your situation if long term illness strikes. You may need to fund help at home and pay for changes to the house to make it more suitable for your condition. Although this is a depressing subject it is one that needs to be fronted. Unfortunately comfort in ill health is often a question of relative financial health and the last thing that you will want holding back your convalescence will be financial worries.

It is vital that the financial advisor/insurance company understands the nature of your income. There are many policies that will pay out solely on salary. Check that dividends are covered , as this is likely to be the route that you have taken a fair proportion of your income to date (*Following IR35, most contractors will no longer receive dividends, so this should no longer be a problem*). Many companies may not be keen to cover against loss of dividends which are often looked at as investment income even though in your case these would soon dry up if you were unable to work. There are a handful of good companies that are happy to cover your income from whatever source you take it. This is an important point to clear up with a potential provider as there is no point in you paying the premium if you will find it difficult to claim.

Whilst deciding which provider to choose it is just as important that the company has a good track record of meeting past claims . Delays in or worst still attempts to limit or avoid payments of benefits in the event of a claim are frustrating and very unfair. The company chosen should be able to provide evidence of previous payments to clients and your adviser should be able to give you feed-back on personal experience of the providers administrative competence. This is one those areas of financial planning that there is far more to picking a provider than cost alone. It is simply not worth trying to save a small amount of money each month by taking cover with a company that will try deter or reduce claims. Unless you can be confident of the provider paying out when you make a claim there is no point in paying at all for cover. Don't just take the companies word for this ask for stats !

Another essential point that is crucial for contractors is that the policy needs to include the definition that you must receive benefit if you are unable to carry out your own occupation. This contrasts to a lesser definition that, if ill the claimant must be unable to carry out any occupation. Bearing in mind your skill level and current income the lesser definition could enable the provider to insist that whilst you were indeed ill, you could still work as a shelf stacker or some other menial job and therefore refuse to pay your claim. This is an area that is often overlooked and could be used as a means of making a quote seem more reasonably priced. You are skilled technicians and cover needs to reflect this.

Looking at the potential impact of you never being able to return to work, you should always ensure that policies should cover you to your chosen retirement date for instance age 60 or 65. You must look carefully at the date that your pension is expected to pay out (remember the state 'old age pension' will not begin until 65 for men and now also 65 for most women contractors) and you may suffer penalties for taking some of your existing pensions early.

Particularly important in the event of a longer-term claim is the impact of the cost of living on your chosen income level. It is essential to inflation proof your benefit. £2000 per month will have a fraction of the spending power in 10 years time as it has today. It is possible to maintain the value of your benefits by ensuring that the amount insured increases by a set amount each year (often known as indexation or escalation). Options could be by 3%, 5% or the government Retail Price Index (RPI). Be realistic when agreeing this figure with an advisor or the company- it is important that the figure is high enough to be of value to you in the future if you were claiming.

Who pays the premium-me or my company? It is possible to pay for the cover personally from your net income in which case benefits in payment are tax free. Alternatively you can fund executive PHI from the company account in which case benefits enter the company tax free but then you pay tax and national insurance on any salary that he/she draws the income out as. Whilst the premium is a business expense in the same way as sellotape or pension payments are and you will pay no benefit in kind for this policy, the real reason for funding your PHI this way will be to ensure that executive pension premiums can be maintained even in ill health. Because you cannot apply a waiver of premium (the 'payment protector' that you can apply to a personal pension so that investment is still made, even if not earning because of illness) an executive pension would have to be suspended after prolonged illness. This is because personally funded PHI is not classed as taxable earnings for pension purposes. However executive PHI pays into your company, salary and therefore pension can be maintained and retirement income is funded. Obviously you will have the choice whether to fund the pension or not and will have to weigh up the impact of your illness on your life expectancy but there are many crippling and not life threatening illness' that you could survive through to lengthy retirement. It would be tragic to be comfortable financially in illness during working age only to be impoverished in retirement due to lack of funded pension.

We can help find the right PHI policy for you. Please read our Private Client Agreement and simply fill in a PHI Finder and we'll get back to you shortly.