Income Protection for the Self-Employed

Why bother with Income Protection when you are self-employed?

Quite simply, because you are not entitled to any statutory sick pay. If you were to fall ill, how would you pay your bills and feed yourself and your family?

You may be entitled to Employment and Support Allowance (ESA) but depending upon your age this can be as little as £56.80 per week for the first thirteen weeks. After this time, depending upon your circumstances this may then be raised to £100.15 or £106.50*. For most people this would mean a substantial drop in their standard of living.

What is Income Protection for the Self-Employed?

Income Protection for the self-employed provides a monthly benefit should you be unable to work, replacing between 50-60% of your taxable income (before income tax). You will not need to provide proof of your earnings at the point of application, but if you were to make a claim you would need to submit evidence of your earnings i.e. tax returns, in order to receive your benefit.

It is important that you accurately represent your annual income when placing your Income Protection policy, as you can easily over insure yourself. This happens when a person attempts to insure say 80% of their taxable income and pays the higher premium for this, but will only ever be able to claim a maximum of 65% of the annual income. This means that you can easily pay a higher premium for cover that you cannot fully claim on, and in most cases you will not get a refund of your overpayments!

It is therefore essential that self-employed individuals regularly review their cover to make sure that they are not over-insured.

How much will this cost?

This really depends upon your budget, savings and retirement expectations. You will need to consider the retirement age that you want the cover to run to, the monthly benefit you require and how long you can wait until the benefit pays.

Income Protection policies for the self-employed will generally run to the ages of 50 to 70; a lower retirement age will usually reduce the price of your policy premiums. You can select your policy benefit to be paid to you for anywhere from 1 year up to your retirement age, the later being the more expensive option.

The deferment period of the policy refers to how long you can wait before the benefit is paid. For the employed, policies are often set for when their statutory sick pay ends. For those with savings, policies can be set to pay a benefit for a time at which they feel their savings may not support them. For the self-employed, it is generally recommended that a short deferment period is chosen due to the lack of financial security of where future funds may come from.

Income Protection deferment periods come as day 1 cover, 1 week, 4 weeks, 8 weeks, 13 weeks, 26 weeks, 52 weeks and 104 weeks. The longer the deferment the lower the policy premiums. In addition to this the policy can be set on guaranteed, reviewable or increasing premiums. Reviewable premiums (annual increase) are generally the cheapest option, but if possible a guaranteed premium is ideal as you will then always know what the cover will cost. An increasing policy and premium provides security against the effects of inflation, but you must take care that you do not become over-insured.

The final aspect you need to consider is if you want your policy to cover you for own occupation, any occupation, suited occupation or working tasks definition. An own occupation definition is the most expensive option possible as you have the potential to make a claim should you be unable to perform your specific job. An any occupation definition may be cheaper as in order to make a claim you must be fully incapable of working, but it is not a desirable form of cover.

You must also consider that any significant medical conditions from your past, or immediate family, could affect the terms that are offered on your policy. Any claim that you make on your Income Protection policy will be verified with your GP so it is important that you fully disclose your medical history at the point of application.

It is important to realise that there are some medical conditions and occupations that can result in your application being accepted with special terms, or in extreme circumstances declined. If you do have a significant medical history or a hazardous occupation please search for your special risk on this site, for an indication as to how your Income Protection application could be assessed.

Bottom line, what will this cost me?

This really does depend upon your budget and the policy options that you make. Please see the examples below as to how much Income Protection could cost you.

Example: A 35 year old non-smoker who is a self-employed builder, wanting to protect £2,000 of his monthly income with a 4 week deferment could find Income Protection for:

Following the EU Gender Directive in December 2012, insurers are now unable to discriminate between male and female applications; females used to be charged higher premiums for Income Protection. If you are a female and already have an Income Protection policy that started before December 2012, we strongly recommend that you review your policy to see if you could secure lower premiums for the same policy benefit.

* https://www.gov.uk/employment-support-allowance/what-youll-get (accessed 29th January 2014)
** Quotes are valid as of 15th January 2014. This represents the base premium for this cover and does not factor in personal circumstances.