Self-Employed Income Protection

Self employed income protection insurance pays out a tax-free monthly benefit should you have to take time off from your business due to sickness or injury. Income protection plans are extremely comprehensive covering practically any medical condition that prevents you from working, including stress, back conditions, heart disease and cancer.

This type of policy provides long-term earnings cover for the self-employed, with plans usually lasting all the way up until your planned retirement age. If a claim needs to be made for a serious (long-term) illness where you could never return to work the policy has the potential to payout each and every month until the policy term ends.

Income protection is the self employed persons safety net. It provides you with the peace of mind knowing if you are too ill or injured to work you will receive a replacement income from the policy to cover your monthly bills.

Kathryn Edwards
Client Support Specialist

Multiple claims can be made on the same policy for shorter term medical conditions where you can return to your business after a period of recovery.

Individuals who manage their own businesses rely on the income they generate themselves from their business to survive. The self-employed are not afforded the same level of protection as those who are employed. For a start, you do not receive sick pay or gain from employer-provided income insurance as part of an employee benefits package.

With government incapacity support of only £99.15 per week (Employment and Support Allowance) it is vital to seek earnings protection from the private insurance market.

The payout from a self employed sickness insurance plan can be used for whatever purpose the policyholder decides. The main uses of these funds are to pay for regular monthly outgoings, such as for mortgage payments, utility bills and other living expenses. There may also be business related uses for the funds, such as to pay replacement staff in your absence.

What about unemployment cover?

This type of earnings insurance plan covers sickness protection. Although plans are available, we do not usually recommend that the self-employed take out unemployment insurance anyhow as most plans state that the business must have been wound up through “no fault of your own”, which is very difficult to argue against if you are in control. In our opinion the risk of the plan not paying out is too high for us to recommend taking out cover.

John runs an IT consultancy and spends most of his time in the office, which enables him to qualify for a plan with the own occupation definition. In the last tax year John earned a gross salary of £100,000 and dividends of £50,000. After reviewing his monthly expenditure John decides to insure 50% of his annual earnings, totalling £75,000 or £6,250 per month.

Two years after taking out the policy John suffers a type of cancer that prevents him from working for 4 years whilst he undergoes treatment and makes a recovery. In the year before the claim was made John actually earned a gross income of £170,000, meaning that the policy would payout the maximum allowable at the start of the plan, equalling £6,250 per month. If John had earned less that the £150,000 reported at the outset of the policy his monthly benefit would be calculated based on that reduced amount.

At the start of the plan John selected a deferred period of 6 months and received his first payment from the insurer of £6,250 at the start of the 7th month. Thus, over the 4 years of incapacity John received 42 monthly payments of £6,250, totalling £262,500, and thus enabling him to meet his financial obligations whilst out of work.

Read our Clients’ Stories…

Click here to meet Rajpreet the Dentist, Ben the Builder and Adrian the Gas Fitter. Find out why they all chose Income Protection to provide the peace of mind they and their family wanted.

With a personal plan you are able to insure up to 65% of your gross (pre-tax) earnings. However, with some insurers it is only possible to cover up to 50% of gross income. Rather than automatically aiming to insurer the maximum allowable it makes more sense to look through your monthly outgoings in order to determine how much cover you really need.

If a claim needs to be made the insurer will usually determine your monthly benefit level based on your previous earnings at the point of claim (subject to the limit of how much you initially covered). Thus, 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 limit (which ranges from 50% to 60%, depending on the insurer).

It is very important to note that some insurers will average your income over the previous three years whereas others will only look back over the previous 12 month, which can influence the most appropriate choice of insurer if your income fluctuates over time. Insures will usually ask for your tax return as evidence of earnings and bank statements are usually sufficient to prove earnings subsequent to a tax return filing.

For a company director it is possible to take out a plan covering gross salary and dividends. With a personal plan it is possible to cover up to 65 per cent of gross earnings as the payout from the policy will be free from income tax and national insurance contributions (NIC). The premiums would be collected from a personal bank account and the benefit would be paid into a personal bank account.

Have your business pay for your income protection…

Another option is to take out an executive income protection plan, where the business pays the premiums on your behalf. With this option it is usually possible to insure up to 80% of gross income as the benefit would be paid to the business and then paid from the business to you, thus incurring income tax and NIC. With this option it is usually possible to put the premiums through as a business expense.

For more information please also see our Directors Income Protection webpage

It is very common for the self-employed to set themselves up as a sole trader. With this set-up it is most appropriate to take out a personal plan covering up to 65% of gross personal earnings. The monthly premiums should be paid from a personal bank account and the benefit would be paid back in to that account tax-free. In other words, the monthly premiums should not be expensed.

When setting up a sole trader income protection policy the level of cover needs to based on personal earnings from your trade, rather than the revenue brought in each year. In order to establish gross income you would need to take your total revenue and then minus your business costs (such as for materials). This is the amount upon which you would pay tax and also the amount upon which you can base cover (of up to 65%).

The occupation definition used for self employed income cover can vary depending on the type of business you undertake.

If you are office based then an ‘own occupation’ definition can usually be used whereby the policy would payout if you were unable to undertake the duties of your usual job role due to sickness or injury. The main exception to this rule is for arts based occupations, such as writers, artists and musicians.

Use our occupation definition calculator to see whether you are eligible for own occupation income protection cover.

For some manual occupations, especially if you work at heights, an ‘any occupation’ or ‘work tasks’ definition might be used. Under an any occupation definition you may be required to undertake a different job type if you are medically capable. A claim would be eligible under a work tasks definition if you were unable to complete a number of ability tasks, such as walking, lifting, climbing or bending.

Please also see – Tips: Gaining Affordable Cover For Manual Workers.

Moving into self employment and leaving the comfort of a paid job can be a big step. The Citizens Advice Bureau provide a useful self-employment checklist that is worth reading.

When becoming self-employed it is really important to ensure that you have the personal insurance protection to support you should the worst happen. Taking out income protection and health insurance should be some of the first steps you take. Some of our clients with medical conditions have even made their decision on whether to go self-employed based on their ability to gain income protection cover.

When policies are taken out the insurer will base the maximum amount of benefit and monthly premiums on your current earnings and occupation. If you are still employed and are looking to move into self employment then the policy can be taken out based on your current situation.

It is not normally necessary to inform the insurer of your employment change although you may wish to do so if your earnings fall as the benefit amount will be reduced along with your monthly premiums. Upon making a claim the insurer will take your earnings at that point for the previous 12 months rather than your earnings used to calculate the monthly benefit at the start of the policy.

If you would like to discuss your policy options or compare self employed income protection quotes from a panel of leading UK insurers then please feel free to contact us. We are an independent income protection insurance intermediary and any advice given is completely impartial and without obligation. Please note that income protection for self-employed individuals is also known as self-employed permanent health insurance.

Given the need to return to work as soon as possible after suffering illness or injury you may also wish to consider self-employed private health insurance, which would allow you to skip potentially long NHS waiting lists and receive the very best treatment in private hospitals.