Income Protection Insurance for IT contractors – in a nutshell

Permanent employees receive a wide range of employment benefits – including protection if they are unable to work due to illness or an injury.

If you work for yourself, on the other hand, you are completely on your own. It is your sole responsibility to protect your income and dependants if you can’t carry out your contracting duties.

Fortunately, one type of insurance – income protection – can help to redress the balance.

Once you set up an IP policy, you will receive financial support if you’re forced away from work due to sickness or injury.

Income protection in a nutshell

• Provides a regular monthly income if you’re unable to work due to illness.
• Policies pay out after a pre-agreed deferred period – usually between four weeks and one year.
• If you purchase via your company, IP premiums are usually tax-deductible, and don’t count as a ‘benefit in kind’.
• An executive policy can cover up to 70-80% of your income, including dividends.
• If you take out a personally funded policy, the percentages are lower – typically between 50 and 60% of income.
• You can often include your partner’s income if they are a co-shareholder of your company.
• You can protect your income until retirement age.
• If you cancel your policy, there is no payout – i.e. there is no surrender value.

What is covered by an IP policy, and what is excluded?

Almost all eventualities, illnesses and injuries are covered by an IP policy, although the precise terms vary between insurers.

Some things are excluded though, such as self-inflicted injuries and drug or alcohol-related illnesses.

If you have any pre-existing medical conditions, you need to disclose them during the application process.

Importantly, IP only covers incapacity due to illness; it is not redundancy cover – for if you lose your job.

What is your insurer’s definition of incapacity?

An important factor to consider when you compare policies is how insurers define incapacity.

• Own occupation – you’re unable to carry out work in a particular role, e.g. as a software contractor.
• Suited occupation – even if you can’t carry out work in your current role (e.g. as a software contractor), you can still work in a different capacity using your current skill set. Perhaps in a less demanding role within the same industry.
• Any occupation – offers the least protection. This means you are expected to carry on working in any type of role.

Consider taking out ‘own occupation’ cover if you are an IT contractor. This is the most comprehensive type of protection It means if you can’t work in your current specialist role, the insurer can’t insist that you take on a different type of role.

What is the tax treatment of an income protection policy?

There are two ways to fund an IP policy – via your limited company, or from your post-tax personal income.

If the company pays the premiums

If you take out an insurance policy via your own limited company, any premiums paid are likely to be treated as a legitimate business expense by HMRC.

This means that the premiums are not treated as a ‘benefit in kind’ – so you don’t pay any extra NICs (the company) or income tax (the contractor).

However, if the policy pays out, the funds are paid to the company and treated the same way as any other type of trading income.

If you take out an individual policy

If you take out an individual policy, the premiums are paid for out of post-tax personal income.

However, any claim-related funds you receive if you are unable to perform your contract duties are tax-free.

We recommend you speak to a specialist financial advisor to work out which is the best route for you to take.

How much does contractor income protection cost?

Like all types of insurance, a wide range of factors affect your likely premium costs, including:

• How much cover you need
• How long does the policy pay out for?
• Are the premiums guaranteed or reviewable?
• Are the premiums index-linked (increasing cover) or fixed (level cover)?
• Are premiums waived during a claim period?
• Your age
• Your occupation – is it a ‘risky’ profession?
• Your retirement age
• The definition of incapacity – own, suited or any (see above).
• Any pre-existing health conditions
• Are you a smoker?
• How each insurance company assesses risk

How do you submit a claim on an Income Protection policy?

1. Get in touch with your insurer’s dedicated claims department.
2. Submit any medical and financial evidence that is asked of you, such as a letter from your GP, or consultant.
3. The insurer makes monthly payments according to the terms of the policy.
4. The payouts continue until the term expires, you retire or are well enough to return to work.

Always use a contractor specialist

According to the ABI, around 85% of IP claims made in 2022 were accepted – with an average payout of just under £22,000.

Although this is a healthy percentage, it means that 3 in 20 claims were rejected.

For this reason, we suggest contractors talk to a specialist IFA to help scan the market for the best type of policy and make sure your specific occupation is covered.

We work closely with specialist IFA, Broadbench. They have excellent customer service and completely understand how contractors work, and what they need.

To find out more or to request a quote, please fill in this form. The team will get right back to you.