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Income protection for contractors

Everything you need to know about income protection for contractors and how these policies work to protect your finances

A photo of Dom Limberg, the author

By Dom Limberg

Published on: 5 July 2023

5 min read

Income protection for contractors

Being a contractor can be very rewarding, giving you more control of when and where you work. One major drawback of contract working is that you lose out on various employee benefits such as sick pay.

Many contractors wrongly believe they can’t have income protection insurance because they are self-employed. This isn’t true at all, and income protection can be very useful for contractors to protect themselves financially if they are ill or injured.

SUMMARY: Contractors are open to a lot more financial risk compared to full time employed people and with less support available. Income protection insurance can offer an additional boost to finances if you need time off work due to sickness or injury.

More on this topic:

Income protection insurance is a widely available insurance policy in the UK. This type of cover works to replace your monthly income if you are unable to work due to an accident or illness.

Depending on the type of policy you choose, you could claim payments until you return to work, for a set number of months/years or until the end of your policy if needed. The main types of income protection are:

You will receive a payment each month which will cover a percentage of your normal income (normally around 60%). This can help with paying for expenses such as:

  • Mortgage or rent payments
  • Utility bills
  • Cost of living
  • Finance e.g. car finance, phone contract
  • Private medical treatment or second opinion

There is a common myth that you need to be employed to qualify for income protection insurance. This is not true and self-employed workers like contractors will also be able to buy policies most of the time.

Income protection can be even more important for contract workers. Contractors won’t have a safety net like a workplace sick pay scheme to protect them if they become seriously ill or injured.

Do contractors need income protection?

It’s not required for contactors to have income protection – but it can certainly be helpful.

You won’t have access to traditional employee benefits if you work on a contract basis. You also won’t qualify for Statutory Sick Pay (SSP) if you are a self-employed contractor. This leaves you open to losing a lot of money if you aren’t able to work due to your health.

When deciding if you need income protection, you should consider:

  • Do you have enough savings to support you if you cannot work?
  • How long could you realistically live with no income?
  • Do you have set monthly outgoings e.g. mortgage, car finance?
  • How much do you pay in monthly outgoings on average?
  • How would your business be affected if you couldn’t work?

Are there other forms of income support for contractors?

Contractors won’t be able to claim Statutory Sick Pay but there is one form of government support that might be available. This is a government funded employment income support scheme that can be useful for:

  • Self employed contractors
  • Sole traders
  • Limited company owners
  • Company directors

You can apply for Employment and Support Allowance or ‘ESA’ if you have a medical condition or disability that prevents you from working. There are various requirements and exclusions, so it is worth checking the Gov.uk website for more information.

The main requirements to qualify for ESA are:

  • You must be employed or self-employed
  • You must have paid enough in National Insurance within the last 2 to 3 years
  • You can’t claim if you claim SSP or Jobseeker’s Allowance

How much is income protection insurance for contract workers?

Income protection works to support you financially if you need an extended period of time off work due to your health.

There are a lot of factors to consider with income protection insurance. You will be asked some basic questions when you apply, which can affect how much you would pay each month. You will be asked:

  • Your age
  • Your height and weight
  • If you have any medical conditions
  • Do you smoke?
  • Are there any lifestyle factors? E.g. a high risk hobby
  • Your occupation

If you have a higher risk job or hobby or you have pre-existing conditions, it is possible you will need to pay more for the cover you need. This is because these factors could increase your chances of claiming. The insurer will assess the level of risk involved in your cover before deciding on a price.

Your policy price will also be based on:

  • The type of income protection policy (e.g. short or long term income protection)
  • Your monthly benefit (£s)
  • Your policy term (years)
  • Your deferred (waiting) period before claim pay outs begin

Choosing a longer deferred period can lower the cost of your policy. It can be worth thinking about having a longer deferred period for your policy if you can afford to do so.

Note: You can normally get an income protection quote online to give you an idea of pricing. If you have medical conditions or other risk factors, you can speak to an income protection expert for proper advice about which insurer and policy is best.

Best income protection for contractors

Income protection is a very flexible form of cover and what works best for one person might not be the best option for someone else.

Most policies will provide some level of support for self-employer workers such as contractors. Certain insurers even provide specific benefits for contractors and other self-employed workers.

Insurers that are best for self-employed income protection:

How much income protection can contractors get?

Your income protection claim pay out will be based on your average income. This can be harder to calculate for someone who works on a contract basis. When you apply for cover you will normally be able to insure up to 60% of your usual income.

The insurer will want to see accounts or tax returns to evidence your income. Your regular income will include:

  • Salary (PAYE)
  • Bonuses
  • Dividends
  • Any fixed costs
ProCon
Supports you financially if you cannot work due to illness or injury for 4 or more weeksYou must be signed off work for at least 4 weeks before claiming. There will also usually be a deferred (waiting) period before payments begin.
Tax-free monthly payouts that cover around 60% of your usual monthly incomeCan be more expensive for people with medical conditions or older people
Covers most illnesses and injuriesProof of income can be harder to provide
Flexible cover and a range of different policy options availableThere can be exclusions attached based on your health or job role (reasons you cannot claim)
Can take as long as needed to recover before returning to workCover isn’t always available depending on your health/job

The fastest way to find a fairly priced income protection policy is to speak to an income protection specialist or financial adviser.

You also have the option of searching for and comparing quotes online. This can sometimes lead to being stuck with higher pricing though if you apply to the wrong providers. You could apply directly to an insurer if you see one you like but this will limit your options for policies.

Resources

Turn2Us – Self employment and benefits 

Citizen’s Advice – Check if you can claim ESA

Statista – UK Self Employment Figures 2023

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