How Does Income Protection For Self Employed Work?
This is a policy that will cover your financial outgoings should you be too ill to work. There are a number of factors you need to understand and make sure are correct when setting up your policy.
How Much Cover Do I Need?
The level of cover is the monthly amount that will be paid out should you need to claim. The higher the figure you cover, the more your premiums will cost.
You can insure a maximum of 70% of your gross (pre-tax) self employed income. However, some providers only allow you to insure up to 50% of your income, so check carefully.
If you’re a sole trader, you establish your gross self employed income by taking your total revenue and subtracting business costs (for example materials). This is the figure you pay tax on and also what you base your level of cover on.
What Is The Deferred Period?
You need to set a deferred period when setting up your policy. It is how long you wait for the insurer to pay out if you can’t work due to an 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.
If you can extend your deferred period by relying on your savings or any sick pay it can significantly reduce your monthly premiums.
How Long Should Your Cover Last?
From the outset you will need to set the age when you want the policy to end. You usually link this with your retirement age or when you expect to be financially secure and no longer reliant on your income.
The older your cease age the more you are likely to suffer an illness, so the more your premiums will cost.
While many providers offer a cease age of all the way up to 70, this will notably increase premiums.
Do You Need Budget Or Comprehensive Cover?
Should a claim arise a budget plan will pay a claim for a limited amount of time regardless of whether you are well enough to return to work. Comprehensive long term cover will continue to pay a claim right up to the end of your policy should you been unable to return to work.
The short-term budget policies only pay out for up to 1, 2 or 5 years per claim. While it’s a cheaper option, a time limit works against you if you become so ill you can’t ever return to work.
Long-term cover, on the other hand, is unlimited. It’s the more expensive option, but continues paying out right up until retirement if your illness or injury stops you from working ever again.
Given leading insurer LV= has an average claim length of 6 to 7 years it makes sense to opt for long term cover if budget suffices.
Should I Choose Guaranteed Or Age Banded Premiums?
When setting up cover you have two types of premiums to choose from:
- Age-banded premiums
Your premiums will rise each year in line with your age based on a preset amount in your policy documents. The increase is solely linked to your age and the growing risk of you claiming as you get older.
- Guaranteed premiums
The insurer cannot increase premiums unless you change the plan. While this has its benefits, they’re not suitable for everyone. For instance, manual workers often get better rates with age-banded premiums, so don’t discount anything until you’ve examined all your options.
Guaranteed premiums tend to be more expensive and for certain higher risk occupations may not be available at all. Which premium type is best for you will come down to your current occupation and your budget.