Many consumers thinking that they are taking steps to protect their family are actually ending up with inadequate or even invalid cover, according to a leading market commentator.
While many people are taking steps to research protection options, price comparison websites are not necessarily the right place to start, according to Andy McBride, Business Development Director at Contractor Mortgages Made Easy.
“With many clients having little first-hand knowledge of the industry, a natural first port of call is a price comparison website, good for comparing credit cards or savings accounts” says Andy. “This is, however, potentially very dangerous for protection, as the finer details are what matter when looking at suitability.”
With many hundreds of protection products on offer to contractors, it is fair to assume that many of these will not be suitable in the majority of circumstances. If this is the case, the best outcome is that you have cover that is of a poor standard, however the worst case scenario could see you unable to make a claim.
“With Income Protection in particular, it is an absolute minefield for contractors due to the way that they pay themselves” adds Andy. “Taking an average contractor for example, operating through a limited company, there could be a very real risk that an historic policy may not pay out due to what providers demand for income proof.”
Unlike other areas of protection such as life insurance or critical illness insurance, Income Protection is very closely linked to your income, and as with the mortgage market, what defines this income can be a grey area, as McBride explains.
“For most permanent employees, it is a simple task to prove what your current salary is by way of payslips or P60s. Of course, for Contractors, this creates an issue, as a contract income of £500 per day, or £125,000 per year, would not be reflected in this way.”
“When you make a claim on an Income Protection policy, it is only at that point that providers verify your income in order to determine the maximum payment that you would receive.”
Income Protection providers typically cover 50-60% of gross income, however one key point missed by people doing their own research, is that this is taxable income, rather than contract value.
“With many limited company contractors, you may find that there is only £60,000 - £80,000 paid in a combination of salary and dividends per year, often split between two directors. This means, assuming a 50% split, that in the eyes of an insurance provider, the income that can be covered is £30,000 - £40,000, a fraction of the contract value” explained Andy.
“This ignores of course the fact that in many scenarios, it will be just one person working to fulfil a contract, and as such, two people would lose out financially if that person were unable to work. Unfortunately, people who think they are doing the right thing by addressing this area could be putting in place cover that may not pay out enough.”
“By undergoing a holistic review of your finances with a Contractor specialist, you can rest easy in the knowledge that someone who understands the way that you work has advised you on the most suitable cover, potentially preventing financial ruin at the worst possible time.”
Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy
Media Contact: Ratchelle Deary, Public Relations Manager
Tel: 01489 555 080