Why contractors are exposed
Contractors trade the security of a permanent job for higher day rates and more control. The trade-off is that there is no sick pay scheme in the background. If you cannot work, the client finds someone else and your invoices stop.
Your company may have some cash in the bank, but its running costs carry on: accountant, insurance, perhaps a pension contribution. A long illness can drain a healthy business account faster than most contractors expect. Once it is gone, you would be using personal savings to pay the mortgage and family bills.
Limited company or umbrella
If you run your own limited company, you are a director and usually pay yourself a mix of salary and dividends. Many insurers will consider both when setting the benefit, often using your share of company profits. Your accountant's figures are the evidence they need.
If you work through an umbrella company, you are its employee on PAYE. You may qualify for statutory sick pay, but that is a small weekly sum. Personal income protection is the main way to top it up, and the insurer will look at your gross pay through the umbrella.
Personal cover or cover through your company
Limited company directors have a choice. A personal policy is paid from your own net income and the benefit is normally tax-free. Executive income protection is owned and paid for by the company, which may be able to treat the cost as a business expense; the benefit goes to the company and is paid to you through payroll.
The best route depends on how you take your income, how long you plan to contract and your tax position. We can explain how each works, and your accountant can confirm the tax treatment for your company. Some contractors hold both, so part of their cover follows them personally whatever happens to the company.
- Personal: you own it, it moves with you, benefit is normally tax-free
- Executive: company pays, may be tax-efficient, ends if the company closes
- Either way, choose the definition of incapacity carefully
- Ask how the insurer treats retained profits in the company
Contract gaps and the waiting period
Most contractors have breaks between contracts. Insurers handle these differently. Some will pay a claim that starts between contracts if you have a steady working history, and others need you to be in work. Ask about this before you buy, because it is a common worry at claim time.
Your deferred period should match how long your company and personal savings would cover your outgoings. A longer wait lowers the cost and suits contractors who keep a healthy buffer. If you have only just started contracting and your reserves are still building, a shorter wait may suit you better for now.
Questions to ask about any contractor policy
Contract work can be specialised, and some definitions of incapacity suit certain roles better than others. A software developer and a site engineer face different risks, and insurers price and word their cover differently. Ask which definition you have been offered and what it would mean if you could still do some other kind of work.
Ask whether the monthly benefit is fixed at the level you were accepted for, or checked against your income when you claim. A fixed benefit suits contractors whose earnings move from year to year. Ask too whether a personal policy can stay with you if you switch from an umbrella to your own company, or back into a permanent role.
- Is the definition own occupation, suited occupation or something else?
- Is the monthly benefit fixed or assessed at claim?
- How does the insurer treat gaps between contracts?
- What happens to the policy if I take a permanent job?
How Hi Tomorrow helps contractors
We ask how you are paid, whether you are inside or outside an umbrella, what reserves you hold and how long you usually go between contracts. Then we compare personal and company options from the insurers on our panel and explain the differences in plain English.
If your company pays, we can help set the policy up in its name and talk to your accountant if that helps. If you ever claim, we can help gather the income evidence the insurer will ask for. That usually means company accounts, tax returns and payslips, which your accountant can often supply quickly.