Those traditionally employed will often benefit from three months of pay should they contract an illness or injury that prevents them from working.
Conversely, contractors are more exposed to financial risks the first day they cannot be on the job site working.
Although this situation may seem frightening and hopeless, there are insurance products available that can help contractors protect their income and financial stability.
Basics of Income Protection Policies for Contractors
Contractors should know that income protection insurance provides them with “sick pay” benefits should they suffer from an accident, injury, or illness that prevents them from working.
This policy will pay their monthly income, up to 70 per cent, after a deferment period chosen when purchasing the policy.
Policies can be arranged based solely on the worker’s contract rate to provide more protection for their monthly income.
Click To Compare QuotesShould the contractor be unable to return to work due to a severe injury or critical, long-term illness, an income protection policy that will provide financial support until the worker’s retirement benefits begin can be arranged.
Contractors can work with a financial or insurance provider to find an income protection policy that meets their needs and carries premium amounts that work with their monthly financial budget.
How Contractors Can Protect Their Income and Way of Life
Contractors can protect and maintain their standard of living by saving a fixed amount of money every month and putting it toward a permanent health insurance policy or PHI.
A PHI policy will help support the policyholder financially should they not be able to work for some reason.
It can also help them maintain their living standards for some time up to retirement should they suffer a more serious accident or illness that prevents them from going back to work.
The financial benefits paid from an income protection policy can be used for any application.
These funds can cover monthly bills such as rent, electricity, heat, etc. Still, they can also cover more significant, dire expenses, such as mortgage payments or maintaining payments on a personal loan.
Having income protection helps contractors ensure that, should they be unable to report to the job site to work, they can still cover their financial responsibilities.
How Income Protection Works for Contactors
- Companies that provide permanent health insurance policies, which are usually insurance companies, will replace the contractor’s income after a specified waiting period. The policyholder predetermines this period.
- The term generally used to describe this period is the “deferred period,” which can last anywhere between a month and a year. The longer the deferred period, the less the policy will cost in premium payments.
- Those with more money put aside in their personal savings account to cover their expenses should they be out of work for some time, such as three to six months, may opt for a longer deferred period to lower their premiums.
- Alternately, contractors who do not have significant personal savings to rely on should consider taking a shorter deferred period to receive their benefits faster and help them manage monthly bills and other financial responsibilities.
- Even though some minor accidents or illnesses are unlikely to trigger an insurance claim, the policy will provide income protection should a more serious, possibly distressing event occur, such as a severe accident or a critical illness that prevents working for a long period. While many believe a long-term injury or illness will happen to them, paying the monthly premium and knowing their financials are protected should something happen down the road is often worth the money.
Amount Paid by Income Protection Policies when a Claim is Made
Income protection policies allow contractors to protect up to 70 percent of their income.
When comparing different policies and providers, policy seekers should be realistic about the amount of protection they need to control the premium cost.
Click To Compare QuotesFor example, some luxuries can be omitted from a monthly budget, while essentials such as a cable television subscription or maintaining a vehicle for mobility may be more important should the policyholder be out of work for an extended period.
Should the policyholder be critically injured, they may need to pay for home modifications or hire in-home care while they are incapacitated, so it is essential to make sure funds are available to cover these costs.
While thinking about these devastating topics is painful, it is essential to remember keeping comfortable when sick or injured will often rely on the financial health someone has and what they can afford to do to get healthy and back to work.
When evaluating different policies and policy options, the provider must understand the nature of the contractor’s income since many insurance products only pay out based on salary.
Policy seekers should determine if dividends are covered in the policy. It is important to note that many insurance providers are not keen on covering the loss of dividends, often considered investment income.
However, the dividends will dry up if the person cannot work.
Considering this, it should be noted that a select group of income protection insurance providers cover income regardless of its source.
Generally, it is pointless to work with a company and pay premiums on a policy when making a claim and receiving benefits is difficult.
When examining different policy providers, make sure to check the company’s track record for meeting past claims.
Delays in paying benefits or efforts to limit or avoid payment of benefits for a claim can be a red flag.
Choosing the Right Income Protection Provider
Any company providing income protection insurance should provide a policy seeker with information on previous payments to its clients for review,
A knowledgeable insurance advisor should be able to provide insight into past client experiences with a specific insurance company.
This is an example of how, when it comes to financial planning, the cost of a policy should not be the only deciding factor—unless the policy seeker is positive that the insurance company will honour its claim, there is no point in paying them a monthly premium for an income protection product.
Occupation Definition for Income Protection Policies for Contractors
Another critical area for contractors to consider when evaluating income protection policies is guaranteeing that the policy will pay out if they cannot perform the tasks of their specific occupation.
There are two different terms assigned to the definition of someone’s work:
- For example, if a contractor were to use any occupation definition and become injured, the insurance company could say they can still perform the duties of shelf stocker or cashier and deny their income protection claim.
- When the own occupation definition is used, the insurance company will need to evaluate the contractor’s illness or injury and determine if they cannot perform the specific tasks of being a contractor. If it is determined they cannot, they will receive their benefits.
Considering Inflation When Choosing an Income Protection Policy
When assessing the financial impact of a long-term injury or illness, it is important to ensure that the income protection policy chosen covers a period that could last until retirement age, which is usually between the ages of 60 and 65.
Contractors should make sure they know the date on which their pension will begin to pay out – “old age pensions” will usually not pay out until age 65 for both male and female contractors – so the term of their policy is scheduled accordingly.
Click To Compare QuotesIt is also important to consider the effects of inflation on living expenses and the value of an income protection policy, so “inflation proofing” a policy is always recommended.
Allotting £2000 a month to cover expenses may seem more than enough now, but ten years from now, that may only cover a fraction of monthly bills.
One way to help account for inflation is to choose a policy that increases the amount insured for every year—many policy providers do this at different percentages, such as 3 percent or 5 percent, or by using the government Retail Price Index, or RPI.
Our knowledgeable insurance advisor team works hard to ensure contractors understand the protections available to them.
We work to provide the client with a concise explanation of coverage while eliminating some of the jargon and making income protection policies more straightforward to understand.
Our team can also help clients decide what type of coverage and options would work best for them, tailoring a policy to meet their income protection needs and budget.