Income protection for contractors

Find out what contractor income protection is, what it includes and who can benefit from taking out a policy.

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Permanent workers are entitled to statutory sick pay, which employers pay for three months if they are too ill to work. However, contractors don’t have the same benefit. Contractor income protection is one way to provide a financial buffer if their income takes a hit. We’ve looked at how you can find the best value policy for you.

What is contractor income protection insurance?

Contractors are self-employed workers and usually work through a limited company. If they can’t work, there are no employer benefits available to them, and this is where contractor income protection can help.

It is an insurance policy which can provide cover if a contractor is unable to work. Money is paid out by an insurer until they can return to work. This can cover any usual outgoings, including mortgage payments or household bills.

What does income protection for contractors cover?

Every insurer will offer slightly different policies, but in general the following should be covered:

  • Any illness or accident that prevents you doing your normal job.
  • Up to 80% of your usual salary.
  • If you pay wages to other employers or make dividend payments, these should be included.
  • If you have a business partner, they are usually included.
  • You choose how long the payments are made, which can be until you retire or die.
  • Pay can begin within one week of an illness or accident.

What doesn’t it cover?

There are some general exclusions with income protection policies for contractors, including the following:

  • An injury or accident that is self inflicted.
  • Illness or injury related to a pre-existing health condition.
  • Anything related to drug or alcohol misuse.
  • If the reason for you being off work is related to criminal activity.
  • If you’ve travelled to a country the Foreign Office has advised against travel to and this has led to you becoming ill or injured.

Do I need contractor income protection insurance?

If you are a contractor, having income protection insurance in place is a way to provide some financial stability if you are unable to work.

This has been especially important since the start of the coronavirus outbreak. However, if you are taking out a brand new policy for this reason, make sure the insurer will accept claims related to the pandemic, as some have changed the way they handle these.

Cost of contractor income protection

The cost of contractor income protection will depend on several different elements, including the following:

  • Your age
  • Your health and medical history
  • Your profession
  • The amount of money you require
  • The length of time you’d like the payout to last for
  • The time between making a claim and receiving the money

How is contractor sick pay taxed?

If you work through a limited company, as many contractors do, and the policy is paid for through this, it will be taxed in a different way from a personal plan you pay for as an individual, which is tax free.

Company policies will be taxed when the payout is made by the insurer. This is the reason you can protect up to 80% of your income, to allow for the money being taken off through tax. With most personal plans, for example, you can only protect up to around 50 or 60% of your income.

Which income protection premiums can I choose from?

When you take out income protection for contractors, you can choose the amount of cover you want, the length you want this to be paid out for, and how you want to pay for the insurance.

There are three different options when it comes to paying for your premiums:

  • Guaranteed premiums. These are set for the duration of the policy and can’t change.
  • Premiums linked to your age. The cost of these premiums will rise as you get older.
  • Reviewable premiums. The cost can change and it’s up to an insurer whether it increases or decreases the premiums.

How to make an income protection claim for contractors

If you need to make a claim for income protection, the first thing to do is to contact your insurer and tell it what has happened. It will let you know what documents it needs and confirm when you’ll start to receive the money, if the claim is successful. You’ll usually need to provide documents including medical notes to show the insurer the details of the accident or illness.

Case study

For example, let’s take the case of a contractor who owns their own limited company. The company director has been off work for six months with a serious illness and hasn’t been eligible for any sickness benefits. If they’d had an income protection policy in place, and their claim was successful, this could’ve paid out a monthly wage to make up the shortfall.

The bottom line

Contractors don’t have the same benefits as workers in permanent positions, and so having income protection is a good way to provide some extra financial protection. It can mean the difference between receiving no income at all if you’re unable to work, or receiving up to 80% of your usual income until you recover.

Frequently asked questions about contractor income protection insurance

The offers compared on this page are chosen from a range of products we can track; we don't cover every product on the market...yet. Unless we've indicated otherwise, products are shown in no particular order or ranking. The terms "best", "top", "cheap" (and variations), aren't product ratings, although we always explain what's great about a product when we highlight it; this is subject to our terms of use. When making a big financial decision, it's wise to consider getting independent financial advice, and always consider your own financial circumstances when comparing products so you get what's right for you.

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