How Does Self Employed Income Protection Work?
There are four major policy decisions you’ll need to make when taking out cover, each of which will have a big impact on the price of your policy. These are:
- Policy cease age
The age you’ll be at the end of the policy. Some providers allow you to run cover all the way up to age 70, but this will be far more expensive than cover which stops at 60 or 65. Set this in line with your expected retirement age, a point at which you could realistically expect to rely on pensions.
- Deferral period
How long you have to be off work sick before you can make a claim. The longer your deferral period, the cheaper cover will be. Set this to align with any savings you might have to tide you over.
- Payout length
The best self employed income protection will pay out long-term, right up until the policy cease age if you were so unwell you could never return to work. Cheaper policies exist, known as short-term cover, that would only pay out for 1, 2 or 5 years per claim. Think carefully whether this would be long enough to recover from a serious illness or injury.
- Sum assured
How much monthly income you’ll receive from the policy each month if off work sick. You can insure a proportion of your gross (pre-tax) income – usually between 50% and 70% of it. The more you insure, the higher your premiums.
How Much Can I Insure?
With a personal protection plan, you are able to insure up to an absolute maximum of 70% of your gross (pre-tax) earnings. However, with some insurers it is only possible to cover up to 50% of gross income. This will obviously have a big impact on the insurer you choose depending on how much you need to insure.
Picking only the insurers that will cover the absolute maximum proportion of your income will rule out many insurers on the wider market that could offer you a better deal.
Rather than automatically aiming to insure the maximum allowable, it makes more sense to look through your monthly outgoings in order to determine how much cover you really need.
Most people look at core outgoings – housing costs, bills, food etc. – to make sure the absolute essentials are covered by Income Protection.
In reality, there’d likely be some luxuries that you’d cut back on in the event of being off work sick, plus you wouldn’t have any commuting costs for example.
Can I Cover Dividends?
Many contractors and self-employed have set themselves up as a limited company where they choose to pay themselves a small salary and the rest in dividends for tax reasons. Most insurers are aware of this and cover dividends as well as PAYE earnings.
Watch Out For Insurers Who Average Your Income
It is very important to note that some insurers will average your income over the previous three years whereas most will only look back over the previous 12 months. This small difference can influence the most appropriate choice of insurer if your income fluctuates over time.
IMPORTANT! Proving Your Income When Making A Claim
In the event of a claim your earnings over the past 12 months will usually determine the level of benefit the insurer will pay out (subject to the limit of how much you initially covered). Insurers will usually ask for your tax return as evidence of your income, if you haven’t yet submitted a tax return recent bank statements are usually sufficient.
If your earnings fall significantly it is important to contact the insurer and lower your level of cover as the insurer will never payout more than the percentage of cover you selected when setting up your policy. If you reduce your level of cover, you’ll also typically reduce the cost of premiums.
Types of Premium
You have three types of premiums open to you when setting up your sickness insurance:
- Reviewable premiums
The insurer can ‘review’ these at any time and so they may rise in a number of circumstances, such as if the insurer has seen an increase in claims or based on economic factors. Such premiums often start out cheaper but then get reviewed upwards and therefore tend to work out more expensive over the life of the policy.
- Age-banded premiums
Age-banded premiums also work out cheaper at the start but then rise each year in line with your age. Unlike reviewable premiums, age-banded premiums can only rise by a preset amount laid out in your policy documents and any rises are solely linked to your age and the increasing risk of you claiming as you get older.
- Guaranteed premiums
Work out slightly more expensive initially, but cannot be adjusted over the life of the policy unless you decide to make any changes to the plan. This generally means guaranteed premiums work out cheaper across the life of the policy, especially if you take out cover when you were young and healthy, as premiums are locked in from the start and can’t change with time.
Setting Your Deferred Period
The deferred period is the length of time you would need to wait before your Income Protection would start paying out should you be unable to work due to an accident or sickness.
Typically the self employed do not receive any sick pay and so the decision will come down to how long any savings could last before you would need the self employed income insurance to kick in and replace your income.
You can set your deferred period as short as 1 week or as long as 1 year. Naturally the longer you are able to wait to make a claim the lower your monthly premiums. Typically a 13 week deferred period can reduce your premiums by up to 50% when compared with a 4 week deferred period.
Your Definition of Incapacity
The definition of incapacity will determine when you can claim benefits from the policy.
The UK’s best Income Protection for self employed workers will cover you under what’s known as the ‘own occupation’ definition of incapacity.
While this definition of incapacity isn’t always available for everyone, it is usually the one that provides the most comprehensive cover.
Own Occupation Cover
This is the best occupation definition and will ensure you’re covered if you can’t do your specific job.
It’s particularly important if you’re a manual worker as there could be many things that would prevent you from doing your job that wouldn’t stop you working in a less physically demanding role. You therefore want cover that will protect you in your own occupation.
Policies that use a suited occupation definition of incapacity mean that in order to claim benefits, you have to be unable to undertake your current job role, or any other job where you may have experience or education to perform.
Any Occupation / Work Tasks
This is a definition of incapacity that means you can only claim if you’re so totally unfit to work that you can’t work in any occupation / perform a set number of tasks required at most basic jobs.
This definition of incapacity is the most difficult to claim on and in general we’d recommend it is best avoided.
How Do I Make a Claim?
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 the claim.
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’s Cancer Claim With British Friendly
Neil is a client of Drewberry and took out an Income Protection policy with British Friendly. He was a member for 4 years before he needed to claim.
He became unwell and had pains in his stomach. After consulting his GP and having some further tests Neil was diagnosed with stage 2 Bowel Cancer and needed to make a claim.
🤕 Read More About Neil’s Claim