Contractors can take out income protection insurance. Here's how you can shop around for a policy that's right for you.
Income protection insurance is very important for contractors who don't receive the sick and annual leave benefits of full-time employees. An income protection policy:
- Covers contractors who are unable to work due to sickness or injury
- Provides a monthly benefit for a set period while you are unable to work.
This guide will let you know what options are available for contractors and help you compare policies to find a better deal on income protection insurance.
What kind of risks are contractors exposed to?
The downside of working as a contractor is that you won’t receive any payment in the event of illness, injury or strike. If you fall ill or become injured, unless you happen to have a substantial amount of money stashed away, you’ll need insurance cover in place.
The challenges you face depend on the job you perform as a contractor. The risks of a construction worker are different from the risks of an admin or office worker, although both professions have their own dangers that must be taken seriously.
According to Safe Work Australia, construction workers suffered most from the following injuries during 2015:
- Cuts and open wounds (31%)
- Sprains and strains (21%)
- Chronic joint or muscle conditions (16%)
In 2015, 33 workers were killed and 35 construction workers were injured each day while on the job.
Safe Work Australia reported that the following issues were the top three dangers facing contractors in the manufacturing sector during 2015:
- Body stressing, manual handling and musculoskeletal disorders
- Slips, trips and falls
- Working with dangerous machinery and equipment
13 workers were killed in 2015, which is below the average of 18 per year.
People in the health profession face risk of exposure to illnesses and viruses. People in corporate jobs may have to deal with stress as well as other issues such as anxiety and depression. These white collar professions often come with a high salary, so losing that income due to injury or illness can be a massive strain.
What types of insurance are available for contractors?
Aside from income protection there are a few other types of insurance a contractor should look at, depending on their circumstances.
|Total and permanent disability (TPD)|
As a contractor, you need to consider if the lump-sum payment will cover your costs for the time you are unable to work. And what happens when the lump sum begins to run out? Will you be well enough to take on more contractor work?
How do insurers classify contractors?
Insurers classify contractors into a number of different classes depending on the nature of the work they do. These include:
- Professional Collar. These are highly qualified and specialist occupations, such as people in the health industry and academics.
- White Collar. This includes office workers with roles that are more mentally taxing rather than physical.
- Light Blue Collar. This refers to people whose job is less than 20% physical work, such as site managers or supervisors on building sites.
- Blue Collar. These are tradesmen and women with specialist skills and qualifications but who don't face any particular hazards.
- Heavy Blue Collar. This category is for people who do manual labour that is not hazardous.
- Special Risk. This refers to people who work in high-risk situations requiring special qualifications.
Looking at the kind of job you have and how you may rate on this list can help you determine if you need income protection. A white collar worker may not seem to be a candidate for insurance as it is difficult to suffer an injury in the office, but don’t forget about stress and other mental illnesses which can result in you being unable to work.
I'm a contractor: how will insurers determine my income and benefits?
As a contractor applying for income protection insurance, an insurer will calculate your earnings based on several possible factors:
- The money you've earned from contracting projects that have been fully completed.
- Your last three months of earnings.
- Some insurance companies ask contractors to provide copies of any contracts they currently have in place.
- Insurance providers may also request evidence of a consistent income for the previous two financial years.
How much does income protection cost for the average contractor?
No two workers have exactly the same needs and this is particularly true of contractors. The cost of income protection insurance depends on:
- Your age
- Your average income
- The type of work you perform as a contractor
The following quotes are examples for a lawn mowing contractor, but the price of an income protection policy will vary widely depending on the type of work a contractor performs.
*These are example quotes only based on a 35-year-old, non-smoking male lawn moving contractor in NSW. These quotes are accurate as of June 2017 and may not be the same for you.
How can I find the right income protection insurance for me?
You need to check the various product disclosure statements of companies which provide these policies. In general, you should look at these items in your policy:
- Definitions. Make sure there is a clear definition of your occupation (and how you are covered).
- Benefit limits. Many policies have an upper limit on benefit payments and typically won't cover more than 75% of your income. Always check a policies limits, especially if you're a high-earning contractor.
- Stepped versus level premiums. Stepped premiums start cheaper but rise over time, while level premiums typically stay flat (adjusted for inflation). Learn more about the differences between the two.
- Benefit period. Most income protection policies will pay benefits for a set period, usually between one and five years. Many policies don't pay out after age 65 so depending on your age you may need to find one that does.
- Waiting period. Policies require claimants to wait for a set period, usually between 14 and 90 days. Consider how long you can afford to go without income when comparing policies.
Contractors should check if their policy has agreed value or indemnity value cover. While your individual case may be different, agreed value is generally better for contractors because it allows you to fix your monthly benefit payments at a level that satisfies your needs. This benefits those contractors whose incomes rise while employed and drop between jobs.
Indemnity value policies pay a benefit based on your income level at the time of your claim. If you are injured or fall ill during a slow month of work you won't be properly covered.
Are contractors eligible for workers' compensation?
In some cases, contractors are eligible for workers' compensation if they can be classed as employees or workers. This depends on:
- Their degree of control over how work is performed
- Their hours of work
- The work they are expected to complete
- Their level of financial risk
- How their superannuation is handled
- How they are paid
- Whether they receive paid leave
- How they pay tax
- Whether they use their own tools and equipment or an employer's
Why contractors should still consider income protection even when they're eligible for workers compensation
- Not covered at work. Even if you do qualify for WorkCover, you may have to wait to receive benefit payments under the scheme. Benefits may even be withheld while your level of disability is assessed.
- Changing legislation. WorkCover is always subjected to legislative change from state or territory governments, which can muddy the waters even further. For example, in July 2012 the NSW state government announced changes to WorkCover legislation which capped medical benefit assistance to injured workers.
- Increased level of cover. Income Protection offers a greater level of cover 24 hours a day—not just when you’re at work. Income protection cover also includes other benefits like childcare cover if you die, and lump sum payments for workplace injuries that result in death or total and permanent disablement.
Are there other insurance options for contractors?
In case you’re not eligible to apply for income protection, there are a few other types of insurance cover you can take out to offer financial assistance when you’re sick or injured:
- Personal accident insurance: If you suffer an accidental injury, personal accident insurance will provide cover by paying up to 75 per cent of your regular income in either lump sum form or as a monthly benefit. Unlike income protection insurance, it doesn’t offer any cover for serious illness. As a result, premiums for personal accident insurance are typically more affordable.
- Accidental death insurance: Accidental death insurance is a straightforward and affordable type of life insurance that provides a lump sum benefit payment for accident-related death or accidental injury. The death of the person insured must not be in any way linked to their state of mental or physical health. This type of cover can offer financial security to your family when you’re gone.