As a contractor, you’ve left the security of a permanent employment package and this should not be under estimated. To forgo benefits such as employee sick pay leaves you vulnerable to financial risk should you be unable to work due to sickness or an accident. To bridge this gap, we recommend an income protection policy or Permanent Health Insurance (PHI) which will provide you with a replacement income in the event of you not being able to work for a duration of time. This gives that important peace of mind that you can maintain your current lifestyle until you are able to return to your contract or until retirement if you never recover.
So how does Income Protection work?
You take out a policy with a PHI provider, who in return will pay a percentage of your lost income, should you be unable to work due to ill-health or an accident. The cost of the policy will depend on the waiting period (or deferred period) that you choose before the policy pays out. Generally, this can be between 4 weeks and 1 year. The longer your chosen deferred period, the less your Permanent Health Insurance will cost. A deferred period of a month will cost you more but will cover you if you needed to stop work in the short term, for example if you had a short illness or a sporting injury.
Dependent upon any savings you may have, you could choose to defer your insurance for a longer period such as 3 to 6 months. This means that you wouldn’t claim for any short term problems but would be covered against a more serious injury or long term illness.
The premiums will be paid from your net pay and upon making a claim the monthly replacement income is paid directly back to you with no tax implications. Insurers will allow you insure yourself for up to a maximum of 65% of your gross salary and dividends, and with some providers this includes split dividends. Should your circumstances change and you no longer require the cover, you can cancel the policy at any point without penalty.
6 tips on choosing the right income protection provider
- Be realistic when planning how much income you will need.
You can protect up to 65% of your income, so although you may be keen to cut back and keep your PHI payments low, be realistic about how much you will need to live off if you are ill or injured over a longer period of time.
- Check that dividends are covered.
It is important that the income protection provider you use fully understands the nature of contracting and how you receive your income. As it is likely that you are taking a large portion of your income through dividends, make sure these are covered by your PHI.
- Don’t just take their word - ask for stats!
Fingers crossed your Income Protection is never needed but if you do suffer a serious accident or illness you need to know that your chosen insurance provider will pay out fairly and quickly. Before signing up, ask the company to evidence previous pay outs to their clients and/or check with your financial adviser to see what previous experience they have had of the company.
- Make sure that your policy is set up to pay out if you are unable to continue working in your own occupation - not just any occupation.
Some PHI policies will only pay out if you are unable to carry out any role, not just your current job role. It is vital that you check this isn’t included within your policy as although you may be too ill or injured to carry out your contracting role, you might still be fit enough to work in a poorly paid menial position and your insurer therefore wouldn’t pay out.
- Ensure the policy covers you to your chosen retirement date.
Depending upon the seriousness of your illness or injury, you may not be able to return to work at all. Please ensure, therefore, that your income protection insurance covers you up to your proposed retirement date. Taking pension payments earlier than your planned retirement date can result in financial penalties!
- Ensure that your benefits are inflation proofed.
Due to the nature of inflation, the amount you can afford to live off now won’t be the same amount in 10 or 15 years time. You can resolve this by ensuring that the figure you are insured for increases incrementally each year. This is known as escalation or indexation and means that the amount you would receive when ill or injured would increase alongside inflation.
For more information on income protection, or to review an existing policy to ensure that it suits your new working status, contact Contractor Financials on 0333 370 8888 or fill in the contact form and a Consultant will be in touch.