Does your income protection cover your contractor lifestyle?

Our friends over at IPSE commissioned Kingston University to research the country’s self-employed. As expected, numbers are growing, with results showing an independent UK workforce of almost 2M. It’s safe to say, contractors and freelancers are now essential to the overall job market.

There is a downside, though. The fear is that many of those now contracting are doing so without adequate life and income protection cover. It’s easy to be blasé when you’ve been contracting a while and operating at full throttle. But the research highlights an unforeseen development: the structure of the new workforce.

The growing number of self-employed is not, as was once thought, a result of the recession. Younger professionals are seizing the opportunity to work for themselves earlier in their careers. The older generation no longer see 60 as a barrier to providing their skillset.

At both ends of the scale, young and old, the report shows significant growth. The number of youngsters contracting, those between 16-29, has shot up by more than a quarter since 2008. The growth is almost double that at the opposite end, with 47% more over-60’s opting to work for themselves.

This insight provides new challenges for insurance, especially life cover. When you’re young, you think death too far off to contemplate. Those in their twilight years are all too conscious of it. So what to do?

It’s up to you to insure your life, not someone else

The impact of premature death on someone with a young family could be catastrophic for their survivors. For the middle-aged, it’s conceivable that they’re reliant on an income if their pension is worth next to nothing.

If money’s tight or you’re guilty of oversight, foregoing life cover exposes you even to greater risk.

There are also contractors who fall between the thirty-year gap that spans the new working life model to consider. They’ve learned their trade as an employee and have realised how much more they can earn under their own steam.

This poses yet another problem. Once you fall outside the safety net of employment, you can come down to Earth with a bang without the cover you once took for granted.

Overall, the number of people contracting has risen by more than a third since 2008. That’s a lot of people who’ve left the comfort of employment and all its perks for more money and independence.

But what many haven’t done is replace the death in service or sick pay benefits they had as an employee. The longer you leave it, the greater the statistical chance of inadequate protection cover catching you out.

When should I take out a policy?

The minute you stop working for an employer, your benefits stop, too. You not only have a responsibility to yourself, but also to your family and the roof over their head.

It’s great that you’re earning more than you’ve ever done. But there are many reasons clients will pay more for your independent services.

Amongst them, they don’t have to work out your tax and NICs; that’s the obvious one. But neither do they have to make provision for holiday pay, sick pay or death in service cover.

True, you can bring a life cover policy with you, one that you’ve taken out yourself. The likelihood is, you took that out as an employee.

Contracting is different. Both your outlook on life and the way insurers and financiers see you, it’s all change! There’s a strong possibility that the life cover you have won’t work for you as a contractor.

Even if you go to a High Street insurer afresh, they’ll see your contract and class you as self-employed. Again, this isn’t the same setup as contracting through a limited company.

Wherever your age lies along the spectrum, see an adviser who understands the way your payment structure works. It’s the only way you’ll access Relevant Life Cover providers.

How much should I insure my life for?

Once you’ve taken out life cover, knowing those who depend on you won’t suffer as a result of your demise, will bring you peace of mind.

It’s an enviable status. To ensure you attain Zen, you must take stock of your financial situation. What many people do is consider the amount outstanding on their mortgage and just make sure that’s covered.

That outlook is sufficient to ensure that your survivors always have a roof over their head. But paying off your house alone won’t put food on the table.

The first priority for the sum that you assure is that it covers all your debts. It must also leave your dependents in a stable financial position by way of a lump sum or a monthly benefit.

When you were an employee, you’ll have had death in service benefits. You may not even have been aware as some are an addendum to your workplace pension.

Relevant Life is a way for contractors to provide similar cover now they’re working for themselves. You can set a policy up in one of two ways:

1. Individual Life Cover policy;
   • suitable whether you’re an umbrella contractor or operate through your own limited company.
   • is often scaled to your outstanding mortgage, but you can also tailor it for a bespoke lump sum.
2. Relevant Life Cover
   • is a type of death in service insurance, but designed for contractors;
   • provides the cover necessary that can leave your loved ones well off when you die;
   • also provides a tax-efficient way for limited company contractors to make those provisions.

Is it worth your limited company footing the bill?

One perspective we hear from time to time is, “Life cover won’t benefit me, so why should I go to the expense?”

Contractors operating through their own company can offset the cost of premiums against tax. If you’re in it for the long haul, this is the way to go.

There are many contractors who are only trying out the lifestyle. It is a complete transformation, so a wary approach may be the best bet for anyone unsure. In this instance, you may not want to set up contractor life cover right from the off.

But the good thing about Relevant Life is that you can take it with you back into permanent employment. Want to change back to contracting? No problem. You can switch it back, too.

Why employee cover carried over doesn’t work

Bringing your own private policy back with you into contracting may not have the desired effect, though. Even if your earnings were considerable and cover substantial, your policy may still fall short.

Outside the contracting and freelancing arena, income protection pays benefits on your average salary. Often, one look at your P60 is all it takes to satisfy the insurer that you earned what you claim.

Should an insurer look at your income based on your contractor accounts, it won’t tell the whole story. With retained profits kept in the company, your low salary and dividends will look like that’s your entire income.

Say you’re earning a modest £80,000 per annum. To optimise tax relief, your accountant will put around £120/week through as salary. Everything else will remain in the company so that they can apply tax relief throughout the year.

Over the course of a 48-week year, that £120/week amounts to a grand salary of £5,760. Given that typical cover is 60-70% of your income, you’d only receive benefit in the region of £3.5-£4k per year on that basis! Nothing like the £48-£56k you’d expect if insuring 60-70% of your £80k gross income.

Takeaway tips

Rather than consider just paying off your mortgage and debts, provide your survivors with an income, too. You can make provision for a lump sum, or to provide survivors with a monthly income once you’re gone.

Also, link your cover and premium payments to the RPI. This will ensure that inflation does not eat away at your level of cover. Monthly benefit of £2,000 will be worth around half of that in, if we’re lucky, a decade from now.

Do make sure that your cover protects your gross income, not a watered down version of your ‘take home’ pay. If you’re earning £80k per annum, your life cover should reflect that. And not just the premiums. ;)

And do consider paying the premiums through your company. As such, the policy will go into a trust that has all manner of tax advantages over personal life insurance.
Don’t forget, the new government will look at IHT as a way of raising taxes. Given the restrictions its imposed on itself on raising other taxes for the next five years, this is more or less a given.

But most of all, make sure your life cover works for you, your way of working as a contractor and your family. There’s nothing quite like the peace of mind that a Relevant Life policy will help you find, knowing that you’re covered come what may.