Income Protection
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Why is Income Protection important for subcontractors?
Let me ask you to consider this question: what would happen if you were ill for a day or two?
I guess you’d lose the income you would otherwise have earned on those days, right? Or at least a portion of it if you’d got in a subcontractor to keep the job ticking over.
What if you were ill for a week or two? Would you have enough savings to pay all the bills if there was no new income being generated?
Now imagine if you were ill for a couple of months, or a year.
A recent study of almost 32,000 workers in the UK revealed that employees lose, on average, 30.4 days of productive time annually due to sick days
You might think I’m young, fit, I don’t get sick. But among the most common reasons for long-term absence are not just the acute medical conditions like heart disease or cancer, but musculoskeletal injuries, stress and back pain. As self employed contractors, those last three are not uncommon conditions.
If you get an injury or do become too ill to work for a prolonged period of time then Income Protection can provide you with a monthly income to keep you going financially. It’s undoubtedly the one protection policy that every working person should consider – and for contractors it’s going to be something you need to arrange for yourself.
What is the benefit?
Typically income protection can cover 60% of your combined monthly income from salary, and dividend based on self assessed profits (not CIS gross income). But the level and period of cover is flexible to match your individual circumstances.
The faster you want to be able to draw on the benefit, and the higher you want that payment to be each month, the more you’ll need to pay as a premium.
It’s a balance, but one you get to set.
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Why would you want it?
Income protection can cover your mortgage or rent, your food bills and regular bills like utilities, credit card repayments, contract van rental, council tax, so that you can rest and focus on getting better and back to work, rather than having financial stresses impact your recovery.
Claims are medically assessed and your doctor needs to certify that you are not fit to be able to do your job.
Normally there is a period of time before the cover kicks in – the ‘deferred period – so you might claim nothing for the first four weeks and then get a certificate to initiate payments from the start of the second month you are incapacitated.
What are the risks of not having it?
Statutory sick pay (SSP) is £94.25 per week if you’re too ill to work but it only covers people who are employees, and only for a maximum of 28 weeks. If you are self-employed, which most contractors are, then you are not eligible for SSP. As a business owner, self employed contractors can use Income Protection to cover a proportion of their income, including monthly salary and dividend.
Payment is monthly and can be made through the company or paid ‘after tax’ by you. If you pay the premiums ‘in person’ then any payout you receive when needed is tax free.
If you prefer to pay the premiums from your company account, the premiums are offset against company profit meaning your tax liability is decreased. For this reason, if you pay the premiums this way then the payout becomes taxable income.
Make your choice depending on your financial commitments and your attitude to risk.
There’s much more to choosing an insurer than cost alone so do some research and make sure the terms and provisions are suitable for your circumstances. You do want to tailor your cover to suit your needs.
For that reason, review your cover every year. Does it need adjusted for a change in circumstances? A bigger mortgage, a new baby, or just to reflect an increase in the general cost of living. You can adjust your cover when you want.
What should I look out for?
Think about the term of cover. If you were to be unable to work again then the earliest you can access pension savings is age 55, so plan for the worst and hope for the best.
Some policies will also insist that if you are fit for some jobs, just not your main occupation, then it won’t pay out. Imagine you’re a roofing contractor who can’t go up ladders, but you could work at a till in a supermarket. You’re a skilled contractor, so don’t try to go for the cheaper premium and be caught out when it’s too late. When you do your research search for ‘contractor income protection’ and make sure the cover is explicitly for you ‘own occupation’.
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- Less than 1 year self-employed
- 5% Deposit
- Less than 3 years in the UK
- High day-rate with low net profit