Being a self-employed IT contractor offers flexibility and freedom, but lacks the safety nets often afforded to full time employees, such as sick pay. Income Protection Insurance is a great way to redress the balance – to allow you the independence to pursue your dreams, whilst avoiding the nightmare of losing your income due to illness. Income Protection policies offer an affordable, budget-friendly solution, for peace of mind that should you be unable to work due to illness or injury, the policy would pay out an income benefit, allowing you to continue to pay your essential outgoings.
Income Protection Insurance can protect up to 70% of your earnings, making sure you can still cover your rent/mortgage, day to day bills, food costs etc. It insures you against losing income due to sickness or accident. Unlike some insurance policies, there is not a specific list of the illnesses or injuries covered and the definition of the severity of the illness is not necessary. If you are ill or injured enough that you get medically signed off from work, then you should be eligible to claim. Some of the most common reasons people claim on a policy are:
IT Contractor Income Protection doesn’t have a set list of conditions covered as you would with a Critical Illness Insurance policy. If you are too ill or injured to do your job, then you should be eligible to make a claim. However, as with all insurance policies, there will be some exclusions which apply to anyone. These are likely to include injuries or illnesses caused:
When taking out a policy, it is important to share with the insurer in the application process any existing or previous illnesses. Previous illnesses could be excluded from your policy or handled differently. Each insurer has their own individual stance on how they will handle your circumstances, but if you have an existing condition. They could require you have to pay an additional premium to cover the condition, alternatively the condition could be excluded completely, or some insurers may be happy to cover the condition completely, with no additional charge. It depends upon each insurer’s appetite for risk as well as your individual circumstances. It is especially important to seek professional advice in this instance to make sure you have the best value and the most complete cover.
We would recommend that you opt for an ‘own occupation’ definition within the policy. This means that your income specifically as an IT Consultant would be protected. Sometimes people can become unable to do their own job, but they could still do a different job. Without the ‘own occupation’ definition, your policy wouldn’t necessarily pay out the benefit, just because you couldn’t do your own job as an IT Consultant.
According to the Office of National Statistics: “The number of self-employed increased from 3.3 million people (12.0% of the labour force) in 2001 to 4.8 million (15.1% of the labour force) in 2017. With such a rapid increase in those working for themselves, it is important to understand that sole traders do not have the same employee rights as PAYE workers. It is therefore vital to have a protection plan in place.
As a freelancer or sole trader your income can be much more inconsistent than those in full-time employment, so it can be more difficult to calculate how much cover you require. It can be helpful to discuss your own individual circumstances with an expert adviser, as there are various factors to consider. You could work out your annual earnings and divide them by 12 to get an idea of your average monthly earnings. However, you wouldn’t need as much cover as you usually earn. Around 50-70% of your gross earnings is a usual amount to protect. The income benefit payments are tax free and it’s likely your spending would reduce if you were unwell or injured anyway.
Work out how much your essential outgoings would be. This would normally be any mortgage or rent costs, your essential bills and if you employ someone else, their wages. Consider how much you have in savings as well and how long this could last for.
Income Protection cover can vary from a short-term policy, which could cover your income with a benefit pay out for a specific term – for example six months or a year. Alternatively, you can purchase a completely comprehensive policy which would cover you for as long as you need until you are fit to return to work, or until you retire, whichever comes first.
Another thing to consider when purchasing a policy is the waiting time or deferral period from the point you become ill, until the time you can make a claim and start to receive the income benefit. The longer the deferral period, the cheaper your monthly premiums will be, so if you have sufficient savings to support you for a while, you could extend the deferral period accordingly.
It’s very easy to put off making decisions about protection insurance, as there is always the feeling that it’s not something that will happen to you. Or it just slides to the bottom of the list of things to do at some stage. Here are some statistics though that show why it’s important to consider protecting yourself now.
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