Insurance
If you are embarking on a career as a contractor, insurance cover is essential to cover you at the least for professional indemnity, equipment and contents, serious illness or injury.
The following provides a basic guide to what you need to know about: Income protection (Critical Illness and Income Replacement), Professional Indemnity Insurance, Public Liability Insurance, Legal Expenses Cover, Employers’ Liability Insurance, Tax Investigation Insurance, Property and Contents Insurance, Car, Medical, and Life. Try to get a package containing the most important insurance covers relevant to your work as a contractor. Income protection
The aim of income protection insurance is to cover you if you fall ill and cannot work for an extended period of time. Essentially, it does for contractors what sick leave does for employees.
By signing up with a permanent health insurance (PHI) provider (i.e. an insurance company) and paying a set monthly figure, you are effectively buying yourself an income in the event you get ill, are injured, or have a serious accident that forces you into early retirement.
The latter can also be covered specifically under Critical Illness Insurance. Upon diagnosis, this provides a lump sum that the insurer cannot take back even if you make a full recovery. Because you work for yourself, a long period of critical illness could have disastrous financial consequences for you and your family. Unlike traditional life insurance, which only pays out in the case of death, Critical Illness Cover will pay out on the diagnosis of a range of serious illnesses, including a heart attack, stroke or cancer. Typically, you will be paid a lump sum, which could then be used for a period of convalescence or to make changes to your house. The cover is arranged by a monthly premium and is often taken out at the same time as Permanent Health Insurance.
If the insurance policy you have taken out is directly related to your business, the premiums you pay will most likely count as expenses. They will therefore be eligible for tax relief.
If you are ill for a period of time, an Income Replacement policy will pay you a regular monthly amount during your illness, allowing you to maintain your normal standard of living. Serious accidents or illnesses can also be covered under an income replacement policy, as some policies can cover your income until your retirement. The benefits will also be tax-free if you pay the premiums personally.
The type of income protection you choose is, of course, up to you. If you are more concerned about short-term incapacity (for example, a sporting injury that could leave you bed-ridden for a month or two), it may be worth paying a bit more for a short deferred period. A deferred period is the time it takes – usually between one month and a year – before the PHI provider begins replacing all or part of your income.
If, instead, you are more concerned about long-term illnesses (or simply have enough savings to cover brief periods of unemployment) you may wish to take a longer deferred period and only begin to receive benefits after three or even six months. The advantage of such a set-up is that, although you wouldn’t be covered for minor illnesses, if you were to have a serious accident or to be diagnosed with a long-term illness, you would be guaranteed protection.
In any event, it is a good idea to take out a health insurance policy while you are in good health, as much for peace of mind as for reduced premiums.
Screen your provider
Insurance companies, like everyone else, are out to make a profit. As such, it is important you screen potential PHI providers thoroughly before signing on to a scheme. Ask them the following questions:
• Do they take inflation into account, so that the amount I’m insuring escalates (i.e., increases every year)?
• Do they have a history of meeting past claims, or have clients who have had to claim benefits encountered a brick wall?
• Do they provide coverage up to your retirement date? (This is important in the event you are unable to return to work)
• Does their policy specify that you can claim benefit as long as you are unable to carry out your occupation, or can you only make a claim if you are unable to perform any occupation?
Professional indemnity insurance
Professional indemnity insurance shields you in the event a client alleges a quantifiable loss due to your negligence or poor advice … and decides to take legal action against you. Negligence, in this case, includes everything from breach of confidentiality or professional duty to loss of documents. Professional indemnity insurance will also cover you if you are accused of libel, slander or breach of copyright.
If your job regularly involves giving clients advice, or if you frequently collaborate with other contractors (making you more vulnerable to liability due to the potential for them, as well as you, to commit errors), it is in your best interest to take out professional indemnity insurance. And, while in some professions (publishing, design, engineering, computer and managing consultancies) it is common best practice to take out a professional indemnity policy, in others (financial services, accountancy, law) it is an actual legal requirement.
When you take out a professional indemnity insurance policy, it is advisable you check that it provides what is known as ‘retroactive cover’: this insures you against any claims that might arise for work dating back to when you started contracting. Likewise, it is worth ensuring you are covered for at least 12 months after you sell or wind up your business in order to protect yourself against any claims that could be made against you for previous work after you have retired.
Public Liability Insurance
This covers you for accidents or damage arising from your work, for example, if a piece of your equipment on client property causes injury to an employee there.
Legal Expenses cover
If you want to bring a claim against someone you have worked with, legal expenses cover will pay your costs.
An insurance expert should be able to advise you on the particular insurance needs of your business and some insurers will “package” different forms of cover for a competitive price.
Employers Liability Insurance
Even if you are a contractor only employing yourself, you are likely to need employers’ liability insurance cover. Your contracts will probably have a substitution clause stating that you have the right to substitute another representative of the company to provide services on your behalf. If you do not have employers’ liability insurance you will be breaking the law if you do contract somebody else to do a job. It can be difficult to establish whether someone working for you is an employee or self-employed, so don’t take the risk and get cover.
Tax Protection
An Inland Revenue investigation can generate considerable costs to the taxpayer. Tax Protection covers you in this event. Some insurers also offer specific insurance cover for IR35 liabilities, which are particularly pertinent to contractors.
Property and Contents insurance
If you are self-employed, insuring your place of work (whether it is a room in your house or part of an office block) and any equipment you use is particularly important. In the case of a fire, flood, break-in or other accident, building and contents insurance will cover everything on the premises, from stock, office equipment and computers to the building’s fixtures and fittings.
If you work from home, it is advisable you check whether the equipment in your office is covered by your home contents insurance policy, or whether you need to specifically take out business insurance. Many insurance companies now combine home contents and business insurance in an effort to target the growing demographic of ‘home workers,’ so it may be worth shopping around for a policy that will cover both your house and your business.
Car insurance
If your work requires you to travel a lot by car (visiting clients on-site, driving places to conduct research, attending conferences and seminars for people of your trade, seeking out new clients), you may consider taking out a car insurance that ensures you a replacement car if yours needs repairs. Medical
If you are a contractor, investing in private medical insurance makes good business sense. If you need medical treatment and are privately insured, you will have access to the best available care and will be less likely to have to wait to be seen by a specialist. The amount of time you are unable to work will be reduced, and the income you save as a consequence should justify the expense on the policy.
Life
While most employees receive ‘death in service’ benefits, which means that on their death their dependants receive a tax-free sum (usually equivalent to three times the employee’s salary), contractors’ next of kin are guaranteed no such security.
As a contractor, it is your responsibility alone to ensure that if something were to happen to you, your dependants – whether they are your children, partner or other close family member – would be protected.
A life insurance policy guarantees that in the event of your death your family – or whomever else you nominate as your beneficiary – receives benefits, either in one lump sum or in annual payments. This money can go towards any mortgage and debt repayments you leave as well as day-to-day living expenses.
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