Whilst many permanent employees have the benefit of paid leave in the event of accident or sickness, as a contractor you do not and are exposed to financial loss as soon as you are unable to work. Contractor income protection insurance is one way that you can protect yourself from financial hardship.
Permanent Health Insurance (PHI)
A permanent health insurance (PHI) policy will support you financially if you are unable to work and can even continue to pay you through to retirement if you suffer a more serious illness or accident.
If you pay these premiums through your company, your company can claim a tax deduction for the premiums paid and there would not be any personal tax liability for you. However, in the event that you make a claim under the policy, any benefits received would be taxable.
If you pay the premiums personally, you do not receive any tax relief on the premiums but in the event of a claim, any benefits received, would be tax free.
At ContractorFinancials, our advisers will cut through the jargon surrounding this type of insurance and will advise you of the important questions to ask providers to ensure that you get the type of cover best suited to your situation. If you already have a PHI policy, we can provide a check list against which to compare your existing policy, to ensure that it is up to scratch.
A PHI provider will replace a part of your income after a waiting period of your choice, referred to as the “deferred period” and will usually be between 4 weeks and a year. For obvious reasons, the longer the deferred period, the cheaper the premiums will be. However, a long deferred period wouldn’t cover a relatively minor illness or accident which will have cleared up before you have reached the deferred period, so you need to bear this in mind when deciding the level of cover you require.
If you have sufficient savings to pay your bills over a shorter term, you may choose to take a longer deferred period and have benefits starting after say, 3 or 6 months. Although minor accidents or illnesses are unlikely to trigger a claim, you will be protected against the potentially devastating impact of a longer-term illness or more serious accident.
One option for contractors who are currently short of funds, is to take a short waiting period now, but to extend the term once finances have improved.
You are able to protect up to 75% of your income through this form of contractor income protection insurance. We would advise you to be realistic when assessing the figure that you will need. Whilst it may be possible to cut back on many areas, there will be some luxuries that become necessities if you are ill over an extended period, such as, a car for mobility or perhaps cable television if you are house bound.
It is vital that your financial advisor is au fait with the nature of your income. Many policies pay out solely on salary and not dividends which will make a tremendous difference to most contractors who receive a small salary with the bulk of their income paid as dividends.
Another important point for contractors is that the policy needs to pay out if you are unable to carry out your own occupation. Some policies will only pay out if you are unable to carry out any occupation; a significant distinction. You do not want to find yourself in the position that whilst your insurer agrees that are indeed ill, you could still work as a shelf stacker or some other menial job and therefore refuse to pay your claim! This is a point that is often overlooked and often used as a means of making a quote seem more reasonably priced. You are highly skilled consultants and your cover needs to reflect this.
As this cover could potentially cover you until retirement, you should ensure that the policy should cover you to your chosen retirement age, for instance age 60 or 65, bearing in mind that the State pension age is getting later and later.
It is also important that you take inflation into account when calculating how much you will need. £1000 in ten years time, will not have the spending power that it does today. It is possible for you to inflation proof the benefits payable under the policy by ensuring that it rises in line with inflation, choosing either a set percentage or the retail prices index, RPI.
If you would like to discuss your pension options further please contact us on 0845 062 8888, complete the online enquiry form opposite or email tonyh@contractorfinancials.com
The value of investments may fall as well as rise and past performance is not a guide to future returns.
Your home may be repossessed if you do not keep up repayments on your mortgage
Financial advice is given by Contractor Financials, which is a trading name of Contractor Financials Ltd and is regulated and authorised by the Financial Conduct Authority.
