Contractors shouldn’t ignore protection insurance

Permanent Health Insurance Vs MPPI

The scandal over mis-sold PPI has meant that a lot of self employed contractors  have refused to take out income protection on their mortgage payments because they do not understand that it is a different product.

Payment protection insurance on a mortgage covers the policy holder in case sickness, accident or unemployment makes it impossible for them to meet their monthly repayments. Payouts normally only last for around a year and policies need to be renewed annually.

It’s thought that approximately two million homeowners currently hold a policy. Last year, the Yorkshire building society says its borrowers made claims worth over £2 million on their mortgage protection insurance.

However, some mortgage lending institutions no longer sell MPPI. Lloyds stopped selling it in July 2010, and Santander pulled out in January this year.

Louise Scott from the Yorkshire building society said she was concerned that customers were being mislead over the PPI scandal and this was putting them off taking out mortgage protection.

Companies that supply MPPI have been criticised for increasing premiums and reducing the level of cover they provide at a time when unemployment is high.

Many of these insurance products sold to contractors were totally unsuitable due to their policy wordings and the way in which contractors work.

Even when contractors are not in a contract, they are still ostensibly employed by their limited company or contractor umbrella company. For this reason the unemployment element of the cover is null and void.

So, what protection policies are worth the paper they are written on?

If protecting your family is important to you, there are plenty of watertight insurance policies that provide a lump sum for the family if a contractor dies prematurely or is diagnosed with a critical illness. This type of insurance cover is not specific to profession or employment status and so are completely appropriate for a freelance contractor.

Similarly, contractor friendly protection policies can be arranged to provide an income if the contractor is ill or injured and is unable to work.

Permanent Health Insurance

These policies are not expensive either, with the average  policy, known as permanent health insurance, costing no more than £35-£45 per month for contractors with no serious medical conditions.

These policies will generally only pay 65% of your normal income as an incentive to get you back to work, although it should also be noted that benefits are tax-free.

Contractors are also able to reduce their monthly payments by opting to extend the period before the insurance starts paying out by up to 12 months, which is another option for contractors with a good pot of savings.