Dentist Rajpreet Drills Into Income Protection
Find out why dentist Rajpreet turned to Income Protection Insurance to safeguard his financial future...
Being your own boss is rewarding, but it often means you don’t receive the same benefits as a permanent employee, such as sick pay. This is where Self Employed Income Protection comes into play. But what exactly is it and do you really need it? In our below guide we’ll tell you everything you need to know.
Self Employed Income Protection provides you with a monthly income if you’re unable to work due to accident or illness. The benefit payments are designed to cover your core monthly outgoings, such as rent/mortgage, household bills and childcare costs. Typically a policy:
Navigating the world of self-employment brings its own set of challenges, not least of which is the lack of traditional safety nets like sick pay. With this in mind it’s vital to safeguard your earnings.
Self Employed Income Protection, offers you financial stability should you be unable to work due to accident or sickness. Not only this it provides peace of mind, allowing you to focus on your recovery without the burden of financial stress.
EXPERT TIP 🤓
According to consumer group Which?, Income Protection is the one policy every working adult should consider.
A Self Employed Income Protection policy works pretty much in the same way as personal one. As mentioned above, if you’re unable to work due to accident or sickness, a policy would pay out a monthly benefit until you’re fit enough to return. This benefit can then be used to cover your monthly outgoings.
Where the difference presents itself is how a policy is paid for. If you operate through your own limited company, you can opt for ‘Executive Income Protection‘. With this particular type of policy, rather than you paying for the premiums out of your own bank account, your company can pay for them. Because of this, there are some tax benefits which we’ll talk about later.
There are a number of policy factors to consider when taking out Self Employed Income Protection. These will impact what your policy looks like and how much it costs. We’ve provided the key factors below.
The level of cover is the monthly amount that will be paid out should you need to claim. The higher the figure, the more your premiums will cost.
You can insure a maximum of 70% of your gross (pre-tax) self employed income. Most providers will insure between 50% and 60% of your income, though.
If you’re a sole trader, you can figure out your gross income by taking your total revenue and subtracting business costs (materials, for example). This is the figure you pay tax on and also what you base your level of cover on.
You need to choose a deferred period when setting up your policy. A deferred period refers to how long you can wait for the insurer to pay out if you can’t work due to accident or sickness.
The longer your deferred period, the lower your premiums. For example, a 13 week deferred period can cut premiums by up to 50% when you compare it to a 4 week deferred period. The shortest deferred periods are 1 week, while the longest are 12 months.
By extending the deferred period of your Income Protection policy to align with your savings or any available sick pay, you can significantly lower your monthly premiums.
Just ensure that your financial buffer is robust enough to support you during this extended waiting period before benefits kick in.
Sophie Guiver
Independent Protection Expert
From the outset you will need to set an age for your Self Employed Income Protection policy to end. You usually link this with your retirement age or when you expect to be financially secure. Many providers offer a cease age up to 70, however the older your cease age, the higher your premiums will be. This is due to the increased risk of you becoming unwell and needing to make a claim.
In the event of a claim, short term cover will pay out for a limited amount of time, regardless of whether you are well enough to return to work. Long term cover however, will continue to pay out until the end of your policy should you not return to work.
Considering leading insurer Aviva had an average claim length of 6. years and 3 months in 2023, it makes sense to pick long term cover if budget suffices.
When taking out Income Protection cover you have a number of premium types to choose from:
Another important factor to consider when taking out Self Employed Income Protection is the ‘Definition of Incapacity’ a provider uses. This is what an insurer uses to determine whether you are fit enough to return to work.
There are three different types that you will come across. Which one your policy refers to will determine if a claim gets paid or not, so it’s important to understand how they differ.
We always recommend Own Occupation Cover because it provides the most comprehensive and specific protection.
This type of cover ensures that if you’re unable to perform in your specific professional role due to illness or injury, you’re eligible for support. With the other definitions claiming may not be as straight forward.
Samantha Haffenden-Angear
Independent Protection Expert
Self Employed Income Protection Insurance is a highly comprehensive form of protection. It covers almost every medical condition that prevents you from working, including, but not limited to:
As with all types of insurance, there are some blanket exclusions which apply to everyone.
For example, you can’t usually claim for illnesses / injuries sustained:
When you set up your Self Employed Income Protection, the insurer will ask you to declare any existing medical conditions. If you have any pre-existing conditions, the insurer will do one of the following depending on the severity:
Getting cover for a pre-existing condition can be tricky. Fortunately, our team of experts know the UK market and each insurer inside out. So we understand which Self Employed Income Protection policies may offer more lenient terms depending on your circumstances.
That’s why it’s worth talking things through with an expert — don’t hesitate to pop us a call on 02084327333 or email us at help@drewberry.co.uk.
Another important area of comparison is the additional benefits on offer from various Income Protection insurers. These are services available, almost always for free, alongside the core accident and sickness insurance.
Insurers have designed many such benefits with overall wellness in mind. You can therefore use them to reduce the chances of you needing to claim or to help speed up your recovery if you are ill. Additional benefits may include:
Many of the services above are available to not only you as the income protection insurance policyholder but also your immediate family, such as your spouse / civil partner or dependent children.
Whether or not you need protection or not is down to your own personal circumstances. However there are a number of questions you need to ask yourself:
A full-time employee is usually entitled to up to 28 weeks of Statutory Sick Pay from their employer if they’re off sick. This is worth £109.40 per week. Many employers offer more than this as standard, though.
If you’re self-employed you don’t get this benefit. Instead, you may be able to claim government incapacity support, known as Employment and Support Allowance. This is up to £84.80 a week for over 25s.
There are other government benefits available depending on the severity of your illness. However, these are rarely sufficient to replace the average weekly UK household expenditure of £528.80 (2021/22).
The Office for National Statistics figures reveal that around 2.7 million people were ‘economically inactive’ due to long-term sickness between Oct and Dec 2023.
Clearly, these are long-term disabilities that go beyond your usual coughs and colds, or even broken bones, if they’re keeping people off work for months.
That’s why Self Employed Income Protection can be so important. After all, if you’re working for yourself, you have less government support than employed people and fewer employee benefits.
This is why self-employed finance blogger Mrs Mummypenny took out Income Protection. She wanted the valued peace of mind that you and your family get when you know your monthly income is protected.
What you pay for income protection when self employed will depend on a number of personal and policy factors. To give you an idea of cost we have provided some examples below. These are based on:
We calculated these prices using our Income Protection quote tool.
The first thing to bear in mind is that each provider will charge you different premiums, even if the cover is pretty much identical. This is because each will have their own appetite for risk and charge differently based on this.
Providers | |
|---|---|
£49.22 | £53.28 |
The longer the deferred period you opt for, the cheaper your premiums will be. Based on the above policy options, we’ve provided example costs from Aviva for various different periods below.
Deferred Periods | 4 | 8 | 13 |
|---|---|---|
£49.22 | £39.35 | £26.79 |
The level of cover you choose will also impact cost. For example a short term policy will be cheaper than a long term one. However, it’s important to remember that short term policies won’t provide the same comprehensive cover as a long term policy.
Short Term Vs Long Term | Level of Cover | Cost |
|---|---|
2 years | £19.67 |
To policy cease age (65) | £49.22 |
As we get older, we become more likely to suffer an injury or fall ill. Older people therefore face higher Income Protection premiums. The earlier you take out a policy, the cheaper it is.
Age | 35 | 40 | 45 |
|---|---|---|
£44.98 | £49.22 | £62.88 |
Being a smoker means you’re more likely to get ill, and more seriously ill, than a non-smoker. Most insurers (although not all) charge smokers higher premiums.
Smoker Vs Non-Smoker | |
|---|---|
🚬 | 🚭 |
£49.22 | £71.94 |
Depending on your health and insurer, you may face higher premiums if you have a pre-existing condition or an adverse medical history.
Some jobs involve more risk than others. For example, manual workers are more likely to have an accident on the job than office workers. The physical nature of manual work also means you’re more likely to be unable to work due to an illness or injury.
For this reason, those in riskier jobs pay more for their Self Employed Income Protection insurance.
As long as you are registered with a UK GP and pay income tax, you are eligible for self-employed cover. Some insurers require you to have up to 12 months of self-employed earnings to justify the level of cover you need, though.
If you are new to self-employment, it is best you speak to an expert adviser to ensure your cover is right for you. Pop us a call on 02084327333 or email us at help@drewberry.co.uk.
For a sole trader, Income Protection is paid from net income so claims are paid out tax-free.
For contractors or company directors of a limited company, there are options in which premiums are tax deductible.
With limited government support and a shortage in savings, Income Protection could well be one of the most important types of cover. It is the one policy that will cover all your core outgoings should you be unable to work due to any illness or injury.
How HMRC taxes Income Protection for self employed individuals, will depend on how you work and how you pay for the policy.
As mentioned, if you work through your own limited company as a contractor or director, there are executive policies where your company can pay for the Income Protection.
In this case, premiums are eligible for corporation tax relief. But as you don’t pay tax on premiums, HMRC taxes the benefit instead when you make a claim. It’s therefore important to gross up the benefit (insure yourself for a higher figure so you get the correct net amount of tax) to compensate.
If you’re self-employed without a limited company, then there’s no ‘entity’ to own and pay for the policy on your behalf.
Sole traders must pay for Income Protection personally, from their own bank account. You typically can’t claim protection insurance policies as a business expense.
However, with personal protection, insurers pay claims tax-free as you pay premiums using income HMRC has already deducted tax from.
Some benefits that are provided by employers are classed as a P11D / Benefit In Kind by HMRC. What this means is that the employee receiving the benefit has to pay additional tax on it. For example with Company Health Insurance.
If you’re company is paying for your Income Protection, the good news is this particular benefit isn’t classed as a P11D/Benefit In Kind, so there will be no additional tax to pay.
When making a claim it is best to make the insurer aware as soon as you become too ill or injured to work. You will need to complete a claims form and the insurer will assess the medical evidence to approve it.
We have a claims team to support you through this process and make it as smooth as possible so you can focus on your recovery.
Neil is a client of Drewberry™ and took out a Income Protection policy when self employed with British Friendly. He was a member for 4 years before he needed to claim.
Unfortunately, he became unwell and had pains in his stomach. After consulting his GP and having further tests, Neil was diagnosed with Stage 2 Bowel Cancer and needed to make a claim. Find out more about Neil’s claim 👇
Most self employed people want to choose cover by picking the insurer that’s most likely to pay out when they need it the most.
However, it’s actually fairly hard to distinguish one provider from another in this area. Payout rates across the industry are not only higher than many assume but are also fairly uniform.
For example, as you can see in the table below, most insurers pay more than 90% of all claims they receive.
Insurer | 2020 | 2021 | 2022 |
|---|---|---|---|
Zurich | 85% | 99% | 85% |
Vitality | 96.8% | N/A | 96.5% |
Shepherds Friendly | N/A | 95% | 96.2% |
Cirencester Friendly | 94% | 93.6% | 95.4% |
Holloway Friendly | 98% | 94% | 93.4% |
British Friendly | 87% | 84% | 90% |
Liverpool Victoria | 95% | 93% | 92% |
The Exeter | 91% | 93% | 92% |
Aviva | 87.5% | 85.4% | 94.3% |
Legal & General | 93% | 81% | 82.2% |
As an independent insurance broker we compare all of the top UK insurers for our self-employed clients. Where we all have different jobs, varying medical history and lifestyle choices the best insurer truly does depend on your personal circumstances.
That’s because each insurer is different and prefers different risks. For example, some are more competitive for higher-risk / manual occupations, while others are better if you want a longer deferred period. We’ve outlined some of the best providers below:
Be aware that it’s not always the cheapest plan that’s the best — policies and providers vary considerably. One might offer a great deal more coverage than the other, so it pays to shop around.
We compare all the leading UK insurers for our clients to make sure they are getting the most cost-effective cover for their personal circumstances.
With fluctuations in earnings and often a broad range of work duties, it can be a bit of a minefield for self-employed workers to set up Income Protection insurance.
That’s why we’re here to make sure you have all the information you need to make an informed decision and arrange the most suitable protection for your needs.
For help and fee-free Income Protection advice, pop us a call on 02084327333 or email us at help@drewberry.co.uk.
We started Drewberry™ because we were tired of being treated like a number.
We all deserve a first class service when it comes to issues as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.