You should invest in an income protection policy so that, in the event you have an accident or become too ill to work, you and your family continue to benefit from an income that maintains your lifestyle. If you don't have a policy and cannot financially cover long periods then you need to seriously consider getting cover.
When choosing to leave employment and go contracting, you simply no longer have the safety net of sick pay and potentially long-term financial support from an employer.
If you are unable to work as a result of illness or an accident, state benefits won’t cover mortgage and household expenses, and a partner or spouse may not have sufficient independent earning capacity to make up the difference. It's the contractors equivalent of sick pay - and that’s why you need it.
How to provide cover for illness
Income protection is an insurance that pays out purely on the basis that you are unable to fulfil your work obligations as a result of illness and have been signed-off by your doctor or medical professional as unfit to work. It does not, for example, provide an income when you are ‘on the bench’ in between contracts.
There are two main types of income protection. Level income protection pays out a set amount of money for the duration of the policy. Or the payments can be index linked from the point of claim so the income keeps pace with inflation.
When choosing an income protection policy, you normally discuss and agree your needs with a financial adviser, identifying what sort of income you would require to replace your contracting fees. This includes setting the termination age of the policy.
You sets the termination age, which is the point when the policy stops paying. This would typically be at the end of a mortgage term, or perhaps at retirement age. The policy will continue to pay out until the termination age is reached, or you are signed-off by your doctor as fit to return to work.
Any occupation or own occupation?
One pitfall that contractors who don’t take professional advice often fall foul of is not correctly specifying whether when assessed to return to work, the policy applies to ‘any occupation’ or ‘own occupation’.
A contractor who signs-up to an ‘any occupation’ policy could find themselves being signed-off to return to work, even though they may not be fit to return to contracting.
If a contractor specifies ‘own occupation’, then they can only be signed-off as fit to return to the contracting role they held before they became too ill to work. That means when they are well enough to work, it will be as a contractor earning the level of income they received before they became ill.
Income protection does not just cover debilitating illnesses
Some contractors choose not to take out income protection insurance because they have unrealistic expectations about what they might be able to achieve if they had an accident or became ill.
When contractors start talking about what might prevent them from working, many believe that they could continue to work from home earning the same level of fees despite an illness or accident. Whilst this might be true for some contractors, for most it is a false expectation.
Take, for example, a contractor who has been in an accident and suffered a spinal injury that significantly reduces their mobility. There are some contractors who could undoubtedly forge a fresh career working for clients remotely and continue to be successful.
But the reality for most contractors is that they are expected to fulfil their duties onsite at their client’s offices. How marketable will the contractors be if they don’t have full mobility? This example shows that contractors need to consider all eventualities when considering income protection.
You not only require income protection to support you and your family during prolonged and serious illness. You also need expert guidance from a financial adviser to ensure that you make the right choices when choosing a policy.