The Truth About Income Protection for the Self Employed

By Vicki Coleman

There’s lots of reasons why you might want to be self-employed. There’s the work-life balance – fantastic. The job satisfaction – wonderful. And the financial incentives – why not?

Yup, there’s a lot to be said for being your own boss. Which is probably why around 4.2 million workers in the UK are self-employed.

But as well as the advantages, there are the downsides, too. Perhaps most notably, the significant knock your income will take if you can’t work due to illness or injury.

Without access to employee benefits, you might want to consider income protection insurance. It can give you the financial support you need while you focus on getting better.

What is income protection?

Income protection gives you a monthly pay-out if you are unable to work as a result of an accident or health condition. Replacing a percentage of your salary, it helps you recoup some of your lost earnings until you’re back on your feet.

In addition to the money you receive when you make a claim, there is also additional support available to help you get back to work sooner rather than later.

Why you need income protection if you’re self-employed

If you work for yourself rather than an employer, you’re not able to claim government support via statutory sick pay (SSP). You may be eligible for an employment and support allowance (ESA), but this is likely to be significantly less than your salary (up to £117.60 a week) and can take three months to process.

If you are self-employed, it is important to consider how you would cope if you were unable to work. For example, if you live by yourself, will you be able to cover your rent/mortgage and monthly bills? Or, if you have dependents, will you be able to support them financially without your income?

You may have savings in place, which you could use to cover your living costs. But on the flipside, if you have debts to pay off, you need to have a plan that allows you to keep up with repayments. Finally, you need to think about how you will keep your business running while you’re out of action.

For many self-employed people, income protection gives them a financial safety net if they are able to work for a period of time.

How does income protection work?

With self-employed income protection, there are various levels of cover you can choose from.

A short-term policy will cover you for a fixed amount of time. If you have to make a claim, you will receive payments until you can return to work or when the policy ends. Meanwhile, with a long-term policy, you will continue to receive payments until you’re able to return to work or ready to retire.

You are able to make as many claims as you need for the duration of the policy and payments will cover up to 70% of your typical income.

Income protection for self-employed people is designed to cover the majority of costs – e.g. rent, mortgage, bills, debts, and living costs. However, there are certain things it cannot be used for – e.g. business costs, your full salary, and large debts (such as paying off your mortgage).

The pay-out you receive will depend on the type of policy you have taken out and the nature of your injury. For instance, if you’re involved in an accident, the waiting period will start the day the injury happened. For health conditions, it will start at the time of diagnosis.

4 things to consider when applying for income protection

In order to provide cover tailored to you, an insurer will assess your work, health and personal circumstances. There are a number of things you will also have to consider during the application process, including:

-        Policy cease age: When you expect to no longer need the policy. Usually retirement age.

-        Deferral period: The length of time you are willing to wait between not being able to work and receiving your first payment. If you have savings, you may choose to delay the first payment.

-        Pay-out length: To get a lower premium, you can opt for a shorter pay-out length (rather than receiving pay-outs until you return to work).

-        Salary, age, medical history: The higher your income and the older you are, the more your premiums may be. Your medical history can also affect the cost of your premiums.

Take action to protect your income

Contractors may go for weeks without taking a day off, which can play havoc with both their physical and mental health. That alone illustrates why income protection makes such good sense for anyone who is self-employed.

To start comparing income protection quotes from leading providers, click here.