Income protection for those who are self employed

Income protection is used to offer financial protection by replacing your wage if you become unable to work due to illness or disability. This can be hugely beneficial, as it enables you to keep paying your bills if your income was to stop.

When you are self-employed, protecting your income is probably even more important than people that are employed, as you have no back up if you are ill and unable to work.

There are a couple of questions which we think are handy indicators of if you have a need for income protection:

• If you became unable to work and your income stopped, would you still have enough money to cover your bills and living expenses for an unknown period of time?
• Would employment support allowance (ESA) be enough to replace your monthly income? Currently, this is assessed on an individual basis and can be up to £117.60*.

The jargon

There’s a lot of words thrown around when it comes to income protection that many people might not understand, I know I wasn’t sure of them until working at Cura. The things that might come up the most are:

• Benefit amount/sum assured – this is the amount you will receive in the event of a successful claim.
• Deferment period – the amount of time that you must be off work before the policy benefit comes in and you can claim any money. This can range from 1 week right up to 52 weeks, depending on the terms of your individual policy.
• Benefit period – the amount of time a successful claim can pay out for. This will usually be a set number of years or until you reach retirement age. 

Self-employed

There are some specific things that you need to look out for and know about when applying for income protection when you are self-employed.

Firstly, check the small print!  

Some insurers will want to see between 2-3 years of your accounts to know what your average earnings are, so that they can figure out how much of your income you can protect. There are some insurers that can look at the last 12 months. What’s really important here is that it’s your job to pick the right option for you, if you buy an income protection policy with an insurer that needs 2-3 years, and you only have 12 months, they’re not going to change their rules for you. This is why our advisers are so useful, as we can help find the right income protection policy for your circumstances.

Secondly, some income protection policies don’t pay much attention to your income. 

I know, this sounds strange. But, there are some insurers that offer income protection policies that have a minimum monthly guaranteed payout of £1,000-£1,500 regardless of your income. This is really useful for people that are self-employed whose income can fluctuate significantly over time. The only drawback to this is that this kind of income protection cover only has a short payout period per successful claim, usually a maximum of 2 years.

Third point, watch out for being over insured! 

When figuring out how much income protection you can arrange the insurer will offer you terms based upon your profit, not your income. Again this is another of the it’s your responsibility rules. A mini math example to hopefully explain what I mean. If your income is £2,000 per month, but your profit is £1,000, when you apply for income protection you must base it on the £1,000 per month. If you put the income protection policy in place using your income (or annual turnover), you will be paying for a higher amount of cover than what the insurer will actually insure. This means at the point of a claim you will only be given financial support based upon your profit, even if you have been paying for a higher level of cover. 

This might seem common sense but the fourth point is that you must suffer a loss of income to make a claim.

Sometimes people can be confused over what the income protection policy will and will not cover. Ultimately it must be a loss of profit and a lack of ongoing income, due to you being ill and unable to work. This policy does not generally protect income if you say lose a contract to someone else, or someone cancels their work with you, it is specifically linked to you being ill and unable to work.

What’s covered?

As with most income protection policies, you would receive a percentage of your monthly salary. This is normally used to cover the likes of bills, rent, living costs, mortgage payments and so on. As a self-employed person you do not have the security of having an employer that will pay you sick pay, and it’s important to really step back and look at your finances to see how you would cope if you become ill and cannot work.

Having an income protection policy in place eases any money worries you might have if you become unwell, and allows you to focus on getting better. If you have any questions or want to see what options might be available to you, get in touch with one of our advisers.

*Correct as of 23rd September 2022.

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