Self Employed Income Protection

With a personal plan you are able to insure up to 65% of your gross (pre-tax) earnings although some insurers maximum is limited to 50% of gross income.

Rather than automatically choosing your maximum level of cover it makes more sense to look through your monthly outgoings in order to determine how much cover you really need.

Are dividends considered income?

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 our 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 others 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.

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.

Self employed insurance is typically paid out of your net income after tax has already been paid.

As you are paying your premiums from income which has already been taxed any benefit payment at the time of a claim would be paid tax free into your personal bank account.

Income Protection as a business expense

Some contractors or company directors prefer to pay for their income protection premiums via their business and there are specific policies that can enable them to do this.

Should a claim arise the benefits are paid out to the company and would be subject to tax when distributing to the individual as income. Given the tax position of this option you are able to cover up to 80% of your gross salary and dividends however if you choose this option it would be best to consult a tax advisor or accountant for advice.

The vast majority of Income Protection providers now publish their claims statistics which is a real step forward in building trust.

Each year the Association of British Insurers (ABI) publishes average payout rate statistics from across all insurers. The latest figures are from 2017 and show that 87.2% of all Income Protection claims were paid, with over £600 million paid out in total.

Income Protection for self employed focuses predominately on accident and sickness cover. While Unemployment Cover exists, it is far better suited to employed individuals.

We do not recommend that the self-employed take out Unemployment Insurance. This is because, even if you weren’t working, self-employed professionals would still be technically employed by themselves and so would be highly unlikely to be able to make a successful claim.

Unfortunately many self employed individuals including contractors and company directors are unaware Sickness Insurance exists. For those who do know it exists many of them do not think they are eligible.

The good news is that both contractors and directors of their own limited company are eligible for cover and it is also possible to cover both your salary and your dividend payments.

Choosing to take out personal cover…

If you choose to take out a personal income protection policy the premiums will be paid from net income. This means that should a claim arise any payment will be paid tax free. When taking out cover it is important you have sufficient evidence you are earning enough to cover the level of benefit you have chosen. Proof can often be provided either with your tax return or series of recent bank statements.

Can my company pay for my income protection?

Most income protection insurance for self employed is designed to be paid personally from your net income after it has been drawn from the business and tax has been paid.

However there are a couple of select providers who offer cover where the business owns and pays for the income protection. This is known as an executive income protection policy and pays any claim payments directly to the business before tax. As a result you can cover up to 80% of gross salary and dividends.

If you are looking to cover more than just a single director as a form of sick pay insurance you may want to consider a Group Income Protection scheme, where you can cover 5 or more employees under a single policy.

If you’re thinking of starting your own business, self-employed sickness insurance is an important step to ensure your earnings are protected if you can’t work.

However, depending on your job role, it may be worth exploring other self-employed insurance options including:

• Public Liability Insurance
  Covers your legal liability for any claims for personal injury or property damage made against you by third parties. If you or your work injures someone or damages their property, this insurance is designed to cover your legal liability.
• Professional Indemnity Insurance
  Designed for professionals who provide advice or a service to clients. It covers your legal liability in case any action is brought against you for any damage done by your advice or service. It covers legal fees and compensation costs that may arise if someone sues for bad advice, for example.
  
• Employers Liability Insurance
  If you hire someone, even just one person, you’re legally required to have Employers Liability Insurance to cover them for any accident or injury they suffer while working for you.
• Personal Accident Insurance
  It is designed to pay out a one off lump sum should you suffer a serious injury or death caused by an accident. Most policies limit the cover to a maximum payout, which can often be around £10,000 for an injury and £20,000 for death. Beware Personal Accident Insurance is not Income Protection and care should be taken when deciding what is the most appropriate cover for your circumstances.

Builders, plumbers, electricians and all other tradesmen make up a large proportion of the UK’s thriving self-employed economy. The physical nature of these jobs means that you have a higher risk of facing an accident at work than someone who spends their days sitting at a desk.

For this reason, many self-employed workers think Personal Accident Insurance is the cover they need to protect them if they have an accident at work and can no longer do their job. However, comparing Income Protection and Personal Accident Insurance side-by-side reveals that they’re actually very different insurance policies.

Income Protection for Self Employed

• Self-Employed Income Protection will be medically underwritten and based on your pre-existing medical history, so you’ll know exactly what you’re covered for from the start of the policy.
• The best Income Protection will be long-term, paying out until you reach retirement should you become so ill or injured you can never work again.
• At Drewberry, we only recommend own occupation Income Protection, as this covers you if you can’t do your specific job through illness or injury.

Personal Accident Insurance

• Personal accident cover is designed to pay out if you are severely injured or die in an accident. Policyholders receive a tax-free lump sum if they are involved in an accident resulting in the loss of one or more limbs, one or both eyes, the loss of use of any of the above, or some other form of permanent disability.
• Although most policies pay out a single lump sum there are some which offer a series of payments often up to 2 years. Such benefit payments would stop after 2 years even if you are still unable to return to work.
• These regular payment options may also use a lesser definition of incapacity, known as the ‘suited occupation’ definition. As a result you may be asked to do another job suited to your skillset if you can’t do your own job. For instance, if you hurt your back and could no longer work as a builder, you might be asked to use your trade knowledge to sell building supplies.

The definition of incapacity used in your self employed accident insurance will determine how severely you need to be injured or ill in order to qualify as ‘incapacitated’.

The three main definitions are:

It is very important that you look at the definition of incapacity when comparing illness and injury insurance because this feature of your policy is key to claiming your benefits if you find yourself unable to work.