Contractors’ Guide to Insuring their Income
Normally, employees are entitled to a pay of up to 3 months in case of a misfortune on their part but for you as a contractor, you are likely to start counting losses the moment you fail to show up to work. The good news is that you can safeguard such situations in an amicable manner.
Permanent Health Insurance (PHI) is a scheme that is made to help contractors protect their income by committing monthly payments towards the scheme. It ensures financial stability over the entire period that you are unable to work, and sometimes guarantees a sustained financial situation through retirement depending on the intensity of illness or injury.
You will be subjected to no tax levies if you pay premiums personally but should you choose to transact through your company there will be taxes applicable.
What happens is that, an insurance company, (usually the facilitator of PHI) replaces a bit of your salary upon an expiry of a period that you get to choose yourself. Under normal circumstances you will have to wait for between a month and a year before you can receive your benefits. This is called the deferred period and it is also used to determine the amount of protection you will be subjected to. (The shorter the period the larger the protection). However, a short wait is only applicable for temporary situations like minor injuries and ailments.
Suggestively for contractors undergoing a thin financial patch, a short waiting period to start with could be a good idea, with the prospects of extending the period once their situation improves. This is with the anticipation that there will be no urgent need for protection then.
Can you insure up to 70% of income?
In situations of bad health, it is good to be considerate of your priorities. If for instance you are deemed permanently or semi-permanently ill, this is a time when some things will need to be sorted out at least to improve or to make your living more comfortable. Maintaining your car or paying for your digital TV may be essentials because of your long illness but whilst that makes sense in your condition, luxury may never be a priority if it comes at the expense of your later life. There comes a time when you do not wish to stress over your financial situation when you have other things to worry about.
Basically it is paramount for your insurance provider to understand your source of income exclusively. Some companies may not be so keen on including outstanding dividends and that might work at your expense. Research for a good company that will gladly own up to paying your income regardless of the source; otherwise it will be baseless committing to paying out premiums that will not be claimed easily.
It is very important for contractors to trigger a clause in the agreement with insurer that they are guaranteed of their benefits in the event that they can no longer continue working. This is the main basis for claim from whatever angle you will look at it.