Income protection for contractors

Income protection pays you a regular monthly income if illness or injury stops you working. It matters more for contractors than for employees because you have no employer sick pay behind you — if you can't invoice, the money simply stops, while the mortgage does not. Cover typically pays a percentage of your earnings after a waiting period you choose, and continues until you recover, retire, or the policy term ends.

Why does income protection matter more for contractors?

Answer first: because you have no employer sick pay behind you. An employee who falls ill has, in most cases, some contractual sick pay and an employer absorbing the disruption. A contractor who can’t work usually can’t invoice — and when the invoices stop, the money stops. Immediately.

The mortgage, of course, does not stop. Nor does anything else. That gap — between the day you stop working and the day money stops arriving — is precisely what income protection is built to fill. It’s the single most relevant protection product for someone whose income depends on their ability to turn up and do the work.

How does income protection work?

It pays you a regular monthly income if illness or injury prevents you from working. Three features define a policy:

The deferred period. This is the waiting time between becoming unable to work and the policy starting to pay. You choose it. A shorter wait means the money arrives sooner but the premium is higher; a longer wait is cheaper. The sensible way to pick it is to ask how many months your savings could realistically cover the mortgage and essentials — and set the deferred period to start around the point that runs out.

The payout amount. Policies typically pay a percentage of your regular earnings rather than the full amount. Insurers cap the proportion deliberately, so there remains an incentive to return to work. Where you pay premiums personally, the benefit is generally paid free of tax.

The definition of incapacity. This is the part people skim and shouldn’t. “Own occupation” cover pays if you can’t do your own job. Weaker definitions might not pay if you could theoretically do some other work — a meaningful difference if your specialism is what earns you a day rate. Own occupation is generally the strongest wording, and worth asking for by name.

How much cover should you take?

Enough that the essentials keep running. Most people start from the mortgage payment, then add the other things that don’t pause when you’re ill — bills, food, childcare, any loans. That’s the floor.

It’s tempting to insure less to keep the premium down, but a policy that doesn’t cover the mortgage leaves the main risk uncovered while still costing you money each month. If budget is tight, it’s usually better to lengthen the deferred period — accepting a longer wait — than to cut the monthly benefit below what your commitments actually need. That way, when the policy does pay, it pays enough to matter.

How does it fit with a contractor’s income?

The same question that dominates contractor mortgages appears here too: what counts as your income? A contractor’s earnings can look different depending on whether you read the day rate, the salary and dividends drawn, or the profit on the accounts.

Getting this right at the point of application matters, because the cover is based on the income you declare — and you want it to reflect what you’d actually lose. This is one reason to arrange protection alongside the mortgage, with an adviser who already understands how your contract income works, rather than filling in a form that was designed for someone on a payslip.

What if you’re a company director?

There’s an additional route worth knowing. Directors can sometimes arrange certain protection through the company rather than personally, which changes who pays and how it’s treated — relevant life cover is the best-known example on the life side, and there are executive income protection structures too.

Whether a company-paid arrangement is better depends on your setup and tax position, so it’s worth raising with both your adviser and your accountant. Our guide on relevant life versus personal life cover explains the principle, and the same logic — company or personal — is worth applying to income protection.

Isn’t critical illness cover the same thing?

No, and the distinction is important. Critical illness cover pays a lump sum on diagnosis of a specified serious condition. Income protection pays a monthly income whenever illness or injury stops you working — whatever the cause, listed or not.

They solve different problems. A back injury that keeps you off site for eight months isn’t a listed critical illness, but it will stop your invoices just as effectively. Many people hold both; if you can only hold one, income protection is usually the one that covers the broader everyday risk to a contractor’s earnings.

The bottom line

Contractors carry a risk employees mostly don’t: no work means no money, immediately, with no employer sick pay to soften it. Income protection replaces a proportion of your earnings if illness or injury stops you working — choose a deferred period that matches your savings, insure enough to cover the mortgage and essentials, and look for own occupation wording. To arrange cover that reflects how you actually earn, speak to an adviser.

This article is general information, not personal advice. The right cover depends on your circumstances, and policy terms, exclusions and definitions vary between insurers.