Is it worth taking out an income protection policy? What if you have already secured life insurance protection? A common misconception is that if you already have an existing financial protection policy, you won’t need another. However different policies can help cover different aspects of your life.
If you have an income protection policy in place, you can claim for any illness/injury that prevents you from working, whereas with life insurance, a claim can only be made after your passing.
Income protection is a form of insurance that pays out a percentage of your typical income to help cover earnings you would have lost if you became unable to work due to illness or injury.
In this simple guide written by life insurance broker Reassured, we break down the 4 reasons UK contractors could benefit from having income protection…
Being self employed
Being a self-employed contractor, you don’t receive traditional sick pay benefits like many employees do.
Without any financial protection, you may need to rely on government benefits such as:
- Employment and support allowance (ESA)
- Income support (universal credit)
If you are relying on government benefits (ESA) as a self-employed contractor, you could receive up to £84.80 per week (assuming you be returning to work) or £129.50 if your incapacity means you could risk not returning to work in the future. Both sums are probably significantly lower than your usual income and may not be enough to get by.
If you have income protection, as someone who is self-employed you will receive a percentage of your earnings, which will be based off your gross income. Although you are not receiving your full salary, you may still be able to pay off essentials like bills and housing payments (such as monthly mortgage repayments or rent).
You don’t receive full sick pay
Whether you receive sick pay as a contractor will depend on your employment status.
While most contractors are self-employed, there are some cases where a contractor could be classed as an employee or worker and therefore are eligible for workplace benefits (such as sick pay).
However, not all employers offer the same sick pay benefits. Some may offer their own company scheme, while others simply provide Statutory Sick Pay.
You can be eligible to get £109.40 per week with Statutory Sick Pay and it is typically paid for up to 28 weeks (which may not be enough to stay afloat). If you are a self-employed contractor, then you will not have this option.
Many people do not have savings in the bank for emergency financial support. You may be in a position where you can’t risk losing an income (by having a family to support) or being self-employed.
By having an income protection policy, up to 70% of your usual income could be paid out, as well as knowing you have that financial security in case you did have an accident or became unwell.
Benefits for your mental health
Whilst there is no set list of health issues covered with income protection, according to Aviva, 30% of their claims are due to mental health (for example: anxiety, depression and stress).
Due to most contractors being self-employed and without any sick pay, many feel they have no choice but to still go to work, which could worsen their mental health.
According to studies, 56% of self-employed workers in the UK have experienced poor mental health over the past 12 months. Despite this figure only 5% felt they could take time off.
Unlike many other forms of cover (e.g., critical illness cover) there isn’t a specific list of conditions included with the policy, making it possible to claim for mental health.
However, if you are currently living with a mental health condition/have a history of mental health issues, then it can be seen as a pre-existing condition and may be excluded from your cover.
Help to cover finances your wages would usually cover
Just because you are unable to work for a period of time, does not mean that life stops. Bills and financial outgoings carry on and without an income, it can be a struggle to keep on top of these.
Many people don’t have any savings to fall back on in the event of an accident or illness which prevents them from working.
This can lead to difficult times, especially if you are the breadwinner of your household. In the UK, it is reported that more than 6 million working households don’t have savings to fall back on.
The monthly payments from income protection can be used to help cover monthly financial commitments, such as:
- Rent/mortgage payments
- Household bills
- Monthly debt payments (e.g car finance and credit cards)
- Childcare/schooling fees
- Day to day expenses
It is important to consider your financial responsibilities as if you were unable to work and had outgoings to pay, without your usual income, it may be a struggle.
How to find a suitable income protection policy
Making sure you find a suitable policy is important to give you the right protection to meet your needs at a great price.
A personal income protection policy is available to all contractors, whether you own a company, are an employed contractor, or perhaps do agency work.
If you are the owner of a limited company, you will also have the option of an executive income protection policy (premiums are paid by the business and could be put down as a business expense).
But to find the best policy, it is important to explore the market for quotes. You can do this via:
- Comparison websites
- Life insurance brokers
- Directly through insurers
As well as being protected financially, you will also benefit from peace of mind that you can still earn an income even if you’re unable to work.