Income Protection for Contractors

One of the downsides of working as an independent contractor is that you don’t have the safety net of employee benefits such as sick leave or disability insurance.  If you are ill or have an accident as an employee, you will still get paid and don’t have to worry about loss of income.  If the illness is long term, you may have either private or public disability payments available as well.

As a contractor, you are on your own since unlike an employer, your clients wont pay you unless you are working.  This is where income protection comes in, to give you some peace of mind in the event you become ill or injured and cannot perform your work.

What is Income Protection?

Income protection is an insurance policy that covers a contractor if they cannot work.  Basically, it replaces a percentage of your income for a set period of time, so that you can recover. 

Why do you need Income Protection?

Unless you have significant savings or family who can support you, income protection may be your only hedge against unforeseen illness or injury.  Many contractors don’t think about this possibility, and forget that they are essentially self-employed and need to protect themselves as the sole provider of revenue.

How does Income Protection work?

Income protection works like most other insurance policies, you pay a monthly premium based on your age, income and type of work (some work is more hazardous leading to a higher premium.)  If you cant work, a percentage of your income is paid out to you, but not indefinitely.

The payments may be capped anywhere from one to five years, and up to 75% of income, depending on your policy.

Factors to Consider when Deciding on Income Protection

As with any insurance product it pays to shop around, and find the best policy based on your own situation.  Here are some factors to consider:

  • Select a provider experienced and credible when working with contractors, and payment of claims.
  • The policy should specify that it will pay your claim if you cannot work in your stated occupation, even if you can work at another.
  • The policy should extend until the date that your retirement benefits kick in, and if possible should have inflation and cost of living adjustments.

How Does Income Protection work with Disability Insurance?

Depending on your nationality and residence, you may also have a government disability coverage, in the event that you cannot work.  However, some of these benefits do not provide coverage unless the disability is long term.  In that case, you would still need income protection for shorter term illnesses or injury recovery. 

The cost of the income protection policy for contractors will vary depending on the level of your income, and you will have to show some income history to qualify.  If you have questions about income protection and other benefits that you may need as a contractor, please contact us at ContractorTaxation so that we can guide you.