PROTECTION GUIDES
Income protection for freelancers and contractors
Contract and freelance work pays well when you are working and nothing when you are not. Here is how income protection works around the way you are paid.
The short answer
Freelancers and contractors can take out income protection to pay a monthly benefit if illness or injury stops them working. How an insurer assesses your earnings depends on how you are paid: as a sole trader, through your own limited company, through an umbrella company or on a fixed-term PAYE contract.
It covers incapacity through illness or injury. It does not cover lost contracts, gaps between contracts or redundancy.
The gap when you cannot work
Most freelancers and contractors are paid for the days they work. If illness or injury stops you, the income usually stops with it, and there is rarely any sick pay beyond the statutory minimum, if that. Your personal bills, and in some cases business costs such as accountancy fees, carry on.
Many contractors keep a cash buffer for gaps between contracts. That same money would also have to cover a period of illness, so it is worth thinking about how long it would realistically last if you were off for several months.
How your working arrangement affects the cover
Sole trader freelancers
Insurers normally look at your taxable profit, often averaged over recent years, as evidenced by tax calculations or accounts. Our guide to self-employed income protection covers this in more detail.
Limited company contractors
Many contractors pay themselves a modest salary topped up with dividends. Insurers differ in how they treat this: some include dividends, some look only at salary, and some use your share of the company's profits. A company-paid executive income protection policy is another option for directors, and may treat earnings more favourably in some cases.
Umbrella company workers
You are employed by the umbrella company and paid through PAYE, so insurers usually assess your taxed earnings. Sick pay is often limited to the statutory minimum.
Fixed-term PAYE contracts
You are assessed much like any employee, but your sick pay may be limited and your contract may end while you are still unwell. Check how the policy handles a claim that continues after a contract has finished.
Who it suits, and when it may not be needed
Who it can suit
- •Contractors and freelancers whose income stops when they stop working
- •Limited company directors with little or no sick pay from their own company
- •Umbrella and fixed-term workers with only statutory sick pay
- •Anyone with a mortgage, rent or family relying on their day rate
When it may not be needed
- •Your savings would comfortably cover a long absence as well as gaps between contracts
- •A partner's income would meet the household's essential bills on its own
- •You already have suitable cover, such as an executive income protection policy through your company
Variable earnings, amount and cost
Day rates, contract lengths and time between contracts all make earnings uneven. The maximum benefit is based on your eligible earnings, usually between 50% and 65% of gross income, and insurers often average them over recent years.
- •Your eligible earnings and how the insurer measures them for your working arrangement
- •The deferred period, set against how long your cash buffer would last
- •Whether the policy pays until retirement or for a limited period on each claim
- •Your occupation and the definition of incapacity, particularly whether you are assessed against your own job
- •Your age, health and smoking status
Basing the benefit on your essential costs rather than your best year can keep the premium manageable and makes it more likely your records will support the full amount at claim. The income protection product page explains the main policy options.
What the cover does not do
Worth knowing
It also replaces part of your earnings, not all of them, and nothing is paid during the deferred period.
Next steps
Gather your recent tax calculations, company accounts or payslips, depending on how you are paid, and a figure for your essential monthly spending. We can then compare how insurers on our panel treat your earnings and your working pattern, and set out the differences between them before you apply.
Talk to us about cover that fits how you work
Tell us how you are paid, what you have earned over the last few years and how long your savings would last, and we will compare how different insurers would treat your income. There is no fee for our advice.
How CoverLife can help
CoverLife Insurance gives personalised protection advice, with a dedicated adviser for your application and ongoing support. We have access to a panel of 15 protection insurers, with availability varying by product and circumstances, and we compare benefits and terms alongside price. We also help with policy reviews and with applications involving medical conditions, unusual occupations or hazardous hobbies.
We charge no advice or arrangement fee; we receive commission from the insurer. CoverLife Insurance is a trading name of CoverTrade Risk Management Ltd, authorised and regulated by the Financial Conduct Authority, firm reference number 1020148. More about CoverLife
Related guides
The questions people usually ask next.
- Self-employed income protectionMore on how insurers assess taxable profit and the evidence they ask for.
- Executive income protectionA company-paid option for limited company contractors, which can treat earnings differently.
- Income protection and sick payHow Statutory Sick Pay works if you contract through an umbrella company or on a fixed-term PAYE basis.
- Why consider income protection?The wider case for protecting your earnings, and when it may not be necessary.
Common questions
Does income protection pay if my contract ends or I cannot find work?+
No. Income protection pays when illness or injury stops you working and you meet the policy's definition of incapacity. It does not cover a contract ending early, gaps between contracts or a shortage of work.
What happens if I fall ill between contracts?+
It depends on the policy. Some insurers assess the claim differently if you were not working when you became ill, for example by using a stricter definition of incapacity. Check how the policy treats periods out of work before you buy it.
How do insurers treat salary and dividends from my limited company?+
It varies. Some insurers include dividends as well as salary when working out your earnings, others look only at salary or at a share of the company's profit. The approach can make a large difference to the maximum benefit, so it is worth comparing.
I work through an umbrella company. Am I treated as employed?+
Usually, for income protection purposes, your earnings through the umbrella company are assessed on your PAYE pay. You may be entitled to Statutory Sick Pay, but umbrella companies often pay no more than that, so the gap can be similar to being self-employed.
Can I keep the policy if I switch between contracting and permanent work?+
A personal policy is yours, so it normally stays in force if you change how you work, provided you keep paying the premiums. It is worth telling us if your earnings or occupation change significantly, so we can check the cover still fits.