Income protection for contractors
Income protection pays a regular, tax-free income if illness or injury stops you working. For contractors with no employer sick pay, it’s the foundation that keeps the mortgage paid when you can’t bill.
Why contractors need it most
As a contractor you have no statutory sick pay, no death-in-service cover and no employer to lean on. If you can’t work, the income simply stops — but the mortgage doesn’t. Income protection replaces a set percentage of your earnings until you recover or retire.
It’s designed for exactly the gap independent professionals fall into when they leave permanent employment.
How it works
- Pays a monthly, usually tax-free, benefit if you can’t work through illness or injury.
- You choose a deferral period — how long you wait before payments start (often 1–6 months).
- Cover continues until you return to work, or to the end of the policy term.
- Executive income protection can be arranged through your limited company as a business expense.
What to look at
- The definition of incapacity — ‘own occupation’ cover is the strongest.
- The deferral period — longer deferrals cost less but leave a bigger gap.
- The percentage of income replaced, typically up to 60–70%.
How much cover should you take?
Start from the outgoings that do not pause when you stop working: the mortgage, bills, food, childcare, any loans. That total is the floor. Insuring below it leaves the main risk uncovered while still costing you a premium every month — the worst of both positions.
If the premium is uncomfortable, the better lever is usually a longer deferral period rather than a smaller monthly benefit. Accepting a longer wait costs you nothing if you never claim, whereas a benefit that does not cover the mortgage fails you precisely when it matters. Work out how many months your savings could realistically carry the household, and set the deferral to start around the point that runs out.
What counts as your income?
Ask three people to state a contractor's income and you may get three answers — the contracted daily figure, the modest sum actually drawn as salary and dividends, or the taxable profit left in the accounts. An insurer builds your benefit around whichever number you give it, so a figure chosen carelessly quietly caps what you could ever claim.
Which is why protection is best set up in the same conversation as the mortgage, by someone who has already worked out how your contract income should be read — not typed into a form whose questions assume a monthly payslip. Directors should also ask about the executive route, where the company meets the premium; the principle is the same one set out in relevant life versus personal cover.
The definition is the policy
Own occupation cover pays if you cannot do your own job. Weaker definitions — sometimes described as suited occupation, or activities of daily living — may not pay if you could theoretically do some other kind of work. For someone whose day rate depends on a specific specialism, that distinction is the difference between a policy that works and one that does not.
Two policies at similar premiums can differ enormously on this point, which is why comparing on price alone is a mistake here. Ask for the definition by name, and read what the insurer means by it.
Income protection, answered
Is income protection worth it for a contractor?+
With no sick pay and a mortgage to cover, it’s often the single most important policy for an independent professional — it keeps your essential outgoings paid if you can’t work for an extended period.
What’s a deferral period?+
It’s the waiting time between being unable to work and payments starting. Matching it to your savings buffer keeps the premium affordable while avoiding a gap you can’t cover.
Can my company pay for it?+
Yes — executive income protection is arranged through a limited company, with premiums usually treated as an allowable business expense. We can explain how this fits a director’s setup.
How long does income protection pay out for?+
It depends on the policy. Long-term cover continues until you recover, reach the end of the term, or retire, whichever comes first. Short-term policies cap payments at a fixed period, commonly one or two years, and cost less as a result. For someone whose income has no employer safety net behind it, the longer-term structure is usually what the cover is for.
Is income protection the same as critical illness cover?+
No, and they solve different problems. Critical illness pays a lump sum on diagnosis of a specified condition. Income protection pays a monthly income whenever illness or injury stops you working, whatever the cause. A back injury that keeps you off site for eight months is unlikely to be a listed critical illness, but it stops your invoices just as effectively.