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Don’t put all your eggs in one basket, spread the risk with income protection

Monday 14th July 2014

When making the decision to go it alone as a Contractor, one possible concern is the lack of fall back on an employee benefits package. Over the years you may have been sold policies such as payment protection insurance but these will no longer be valid now that you are a Contractor. The one protection policy every working Contractor in the UK should consider is the very one most of us don’t have – income protection.

What is Income Protection?

Due to your unique working status, protecting your income should be an essential consideration when becoming a Contractor. If you are unable to work due to illness or injury, the onus is very much on yourself to continue to pull in the money. But through no fault of your own, you may find yourself in a situation where you are unable to work for a long duration. This could have, very serious implications on your finances.

Contractor Financials have sourced Contractor friendly income protection policies that can help bridge the gap when you are unable to work through accident or sickness, and will continue to pay through to retirement if your illness is prolonged. Income Protection or Permanent Health Insurance (PHI) will pay a tax-free monthly income that can offer an essential lifeline.

How it works:

  • An IP policy will typically pay your benefit after a waiting period of your choice, this is known as a ‘deferment period’.
  • The deferment can be any length of time from 4 weeks up to a year.
  • There is a policy that covers you from day one of an illness or injury which is essential for Contractors who don’t have savings to fall back on in the short term.
  • The longer the deferment period the less the protection will cost to provide.
  • A recommendation for Contractors who are low on funds in the shorter term is to take a short deferment, but extend the term once finances improve as this means you will not require such immediate protection. This will help to lower your premiums.

It is really important at the outset of a policy to realistically consider how much money you would need to sustain an acceptable standard of living if you were unable to work due to ill health. Although very hard to imagine when you are fit and well, a provision needs to be made for such things as care and assistance in the home, and paying for the considered luxuries in life i.e. running a car.

How much of my income can I protect?

Contractors are fortunately able to benefit from a specifically negotiated contract-based income protection rate. As unlike a traditional income protection policythat protects up to 55% of gross income, this specially designed rate will cover up to 50% of your gross contract income instead. This is fantastic for Contractors as on paper your accounts may not look so favourable, as you may typically draw a low salary and take dividends to avoid high taxes.

In simplistic terms a Contractor on a £60 hourly rate working 35 hours per week, could earn a gross yearly contract rate of £100,800 based on working 48 weeks a year. A Contractor could then have an Income Protection Policy of £4200 per month.

Added protection:

With an IP policy it is essential to inflation proof your cover. This should be of great importance to a Contractor ensuring that the amount insured is indexed to the RPI, as inflation over time would have a huge impact on your income in the event of a claim.

To discuss your policy requirements, contact the experienced Protection Advisers at Contractor Financials on 0208 150 3844 or email 123contracting@contractorfinancials.com

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