When you leave your permanent job behind for a new life in the contracting world, you’ll no longer receive any of the ‘perks’ you may have enjoyed as an employee. As a contractor, you only get paid when you’re working, so what happens if you’re unable to work due to illness? As a traditional worker, you would continue to get paid while off-sick, but as a contractor, you need to consider if your savings alone will see you through some time away from your contract duties.
This is where the concept of income protection comes in. By investing personally (or via your company) into a permanent health insurance (PHI) policy, you will have a safeguard to protect you in the event of you falling ill and being unable to work. This type of policy will pay you a monthly income while you’re ill, and they tend to be very reasonably priced.
Here we take a look at how income protection works, and which factors affect the premium you’ll have to pay.
Income protection – how does it work?
A PHI policy will pay you a pre-agreed monthly payment while you’re off sick, and even until retirement, if you’re seriously ill. The amount of benefit you can receive depends on your contract income, and the ‘deferred period’ (the length of time before the policy starts to pay out) you choose.
This waiting period is usually somewhere between four weeks and a year, but there are also policies that will cover you from day one of an accident or illness which is ideal if you don’t have any savings to fall back on. You can typically cover yourself for up to 80% of your current contract income level if you pay for the cover through your limited company (see below) and around 55% if you pay for the cover personally.
Things to consider when choosing a PHI provider
- Ideally, you should use a provider who has experience of the contracting market, and how contractors operate.
- Make sure that dividends is included in any calculations, as they make up the bulk of most limited company contractors’ income. Some providers consider dividends to be ‘investment income’, rather than traditional income, which again explains why you should seek a provider with experience of dealing with small companies and freelancers.
- Make sure any income protection providers you compare have good records of dealing with and meeting past claims (your financial adviser will be able to help you with this).
- Your policy must specifically state that you will receive benefit if you’re unable to carry out your own occupation (as a contractor). If this isn’t stated, the provider may claim that you’re still able to carry out a different type of work, even if you’re unable to perform your contract duties.
- Make sure your policy covers you until you plan to retire.
- Make sure your policy is inflation-proofed.
Who pays? Me or my limited company?
You can choose to pay for your income protection policy either as an individual, or via your limited company.
If you pay personally, you will be doing so with post-tax income, whereas an executive PHI policy is an allowable business expense, and therefore tax-deductible for your company.
And, if you do make a claim, you’ll have to pay tax on payments made via the policy if it’s an executive policy, which isn’t the case if you have an individually-funded policy.
To discuss your options, we recommend you talk to an independent financial advisor (IFA). We’ve worked with the team behind CMME for over 15 years – they’ve helped tens of thousands of contractors find the right financial services products over this time. Simply click here to find out more about PHI, and to find out how much a tailored policy would cost.
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