Contractors accept a trade-off when they move away from employment. Higher earning potential in exchange for less security — no sick pay, no employer pension contributions, no death in service benefit, no group income protection. Most contractors understand this going in, but fewer take the practical steps to replace the protection they have given up.
The consequences of not being covered can be severe. A contractor who cannot work due to illness or injury has no income from day one. A serious diagnosis with no critical illness cover can mean a mortgage becomes unmanageable at exactly the wrong time. A limited company director who dies without relevant life cover leaves their family without the tax-efficient protection an employer would have provided.
Income protection pays a monthly benefit if you are unable to work due to illness or injury. For contractors, it is arguably the most important insurance product available — because without it, a period of ill health means no income from the moment you stop working.
Contractor income protection is structured differently from employed income protection. Policies can be written to cover a defined monthly amount — typically up to 70% of your average monthly earnings — with a deferred period (the time before the policy pays out) of four, eight, thirteen, twenty-six or fifty-two weeks. A longer deferred period reduces the premium, but you need sufficient savings to cover the gap.
For limited company directors, income protection policies can sometimes be written through the company rather than personally, which has tax advantages worth exploring. We review the most suitable structure for your situation as part of the advice process.
Relevant life insurance is a single life policy taken out by a limited company to provide a death-in-service benefit for an employee or director. The premiums are paid by the company as a business expense, making them corporation tax deductible. The benefit is paid into a discretionary trust, keeping it outside the director’s estate for inheritance tax purposes.
For a limited company contractor who would otherwise pay life insurance premiums from post-tax personal income, relevant life insurance can deliver the same level of cover at significantly lower net cost. The comparison depends on your tax position, but for many contractors, relevant life is substantially more cost-effective than a personal policy.
Critical illness cover pays a tax-free lump sum on diagnosis of a specified serious condition — typically including cancer, heart attack, stroke and a range of other life-altering diagnoses. The lump sum is designed to provide financial breathing room at a time when work may be impossible and medical costs may be high.
For contractors with a mortgage, a critical illness lump sum can be structured to clear the outstanding mortgage balance entirely, removing one major financial pressure during treatment and recovery. Policies can be written on a decreasing basis (tracking the mortgage balance) or a level basis (fixed sum throughout). We advise on the most appropriate structure based on your mortgage and personal circumstances.
Standard life insurance provides a lump sum on death. For contractors with dependants and a mortgage, this is straightforward and essential — the sum assured should be sufficient to clear the mortgage and provide for the family’s ongoing needs.
Family income benefit is an alternative or complement to lump sum life insurance. Rather than paying a single lump sum, it pays a monthly tax-free income for the remainder of the policy term from the date of death. For families with young children, a monthly income can be easier to manage than a large lump sum and can be structured to provide income until children have grown up and left home.
Contractors who rely entirely on NHS care face the same waiting times as everyone else — but a contractor who cannot work is losing income from day one. Private health insurance provides faster access to diagnosis, treatment and surgery, reducing the period of time you are unable to work and generating income.
Private health cover for contractors can be structured as a personal policy or, for limited company directors, as a company benefit. Company-paid policies are subject to benefit-in-kind tax, which affects the overall cost — we work through the numbers with you to identify the most tax-efficient approach.
The standard guideline is cover that replaces up to 70% of your average monthly earnings, though the right amount depends on your essential monthly outgoings — mortgage payments, household costs, any loan commitments. We review your full financial picture and recommend a benefit level that covers your needs without over-insuring.
Yes. Insurers base contractor income protection on an average of your earnings over the previous twelve months. Variable income is common in contracting and most specialist insurers understand it. We source policies from providers who take a realistic view of contractor earnings rather than requiring fixed monthly income.
The cover is similar — both pay a lump sum on death. The key differences are in how they are paid for, taxed and treated for inheritance tax purposes. Relevant life premiums are a corporation tax-deductible company expense; personal premiums are paid from post-tax income. Relevant life benefits are written in trust, outside the estate; personal policy benefits form part of the estate unless separately written in trust. For most limited company contractors, relevant life is the more cost-effective option.
They cover different eventualities and many contractors benefit from having both. Income protection covers any condition that stops you working for a period of time, including recovery after surgery, mental health conditions and long-term illness. Critical illness pays a lump sum on diagnosis of specific serious conditions. The two products complement each other rather than duplicating cover.
Yes, though the premium paid by the company is treated as a benefit in kind, meaning you pay income tax on the value of the benefit. Whether this is still more cost-effective than paying personally depends on your marginal tax rate and the cost of the policy. We calculate the net cost under both arrangements and advise accordingly.