Why Self Employed Income Protection?
Self employed insurance provides you with a monthly income if you cannot work due to accident or sickness.
Designed to cover your core monthly financial commitments such as your mortgage/rent, bills and food.
Income Protection is the one protection policy every working adult should consider. Which? Money
41% of employees have been made redundant or suffered long-term ill health during their working life. Met Life
Speak to our expert independent advisers or get an instant online quote to compare the UK’s leading insurers.
What is Self Employed Sickness Insurance?
Income Protection Insurance for self employed professionals provides a monthly cash benefit to meet your financial obligations should you be unable to work due to any accident or sickness.
You are able to protect up to 65% of your gross annual salary and any benefit paid out during a claim is paid tax free.
It is a highly comprehensive form of protection insurance, covering practically any medical condition that prevents you from working (subject to any pre-existing medical history) including:
- Back conditions
- Heart disease
With a lack of employer-provided sick pay and many self-employed having limited savings a suitable income protection policy can often be the difference between paying your monthly bills and not if you end up too ill or injured to earn a living.
What can you protect?
The most common living expenses individuals choose to protect with Income Protection include:
- Rent / mortgage repayments
- Property taxes and related bills
- Car running costs
- School fees etc.
Choosing a deferred period
When setting up your policy you choose your deferred period which is the amount of time you need to be off of work before a claim would start to be paid. Deferred periods can be as short as 1 day or as long as 52 weeks. It is best to align it with any sick pay or savings you may have as the longer the deferred period the lower the cost of the cover.
Long term cover
Traditional sickness insurance would start to pay a claim after your deferred period and continue for as long as you were unable to work which could be right up until your expected retirement age.
These short term options again would pay out after your deferred period but would limit the claim to a maximum period of 12 months, 24 months or 5 years per illness/injury.
Be careful with short term options, the insurer LV has an average claim length of 7 years.
How does Income Protection for Self Employed work?
John is an IT contractor and in the last tax year John earned a gross salary of £72,000. After reviewing his monthly expenditure John decides to take out a long term policy with a deferred period of 13 weeks covering 50% of his annual earnings, totalling £36,000 or £3,000 per month.
John needs to makes a claim
2 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.
John speaks to the insurer as soon as he knows he is likely to make a claim. The claims form and any associated documentation gets completed and the Income Protection provider works with John and his doctor to approve his claim as quickly as possible.
The claim gets approved and starts being paid after John’s 13 week deferred period. This means he received his first payment from the insurer of £3,000 after the first 3 months out of work where he had to rely on his savings.
Where John opted for long term cover the policy continued to pay out until he was able to return to work. Over his 4 years of incapacity John received 45 monthly payments of £3,000, totalling £135,000.
These monthly payments enabled him to meet his financial obligations whilst out of work and focus his energy on his recovery.
Do I need Self Employed Insurance?
Despite how optimistic we may be about our health, illness and injury can come on unexpectedly, even to those who are careful.
When deciding if Accident and Sickness Insurance is worthwhile it makes sense to weigh up the risk of something happening and the potential consequences:
The Incapacity Risk:
In 2018, 14.7% of the over-55’s said they’d been out of work for at least 6 months at some point during their entire careers.
With Employment and Support Allowance standing at just £73.10 per week, many people would struggle to survive if out of work due to illness or injury and claiming benefits. While other benefits are available, they’re unlikely to make up for your full lost income if you couldn’t work.
Our 2017 Wealth & Protection survey found that 2 out of 5 people in the UK have no more than £1,000 in cash savings and 1 in 4 people working still have less than £100 at the end of the month after paying for the essentials.
If you couldn’t work how would you continue to cover your bills if you didn’t have income protection?
How much does Income Protection cost?
There are a number of factors that will determine the cost of self employed Income Protection, some of key policy factors which you can control include:
- Level of cover
The amount of cover you want to insure will be the biggest influencer of cost. This is why it makes sense to calculate how much cover you actually need rather than simply choosing the maximum available.
- Deferred period
The longer you set your deferred period, the lower your premiums. You can set your deferred for as long as 52 weeks with some insurers, but you need to bear in mind that you will not be receiving any payment of benefit during this period so you will need enough savings or sick pay to tie you over.
- Length of cover
The longer the policy term the higher the risk of needing to claim and this is reflected in higher premiums.
- Premium type
Choose either guaranteed, age banded or reviewable premiums. Although guaranteed premiums are often more expensive from the outset over the full term of the policy they can work out more cost-effective than premiums which increase over time.
Other personal factors that you have less control over which will still impact on the cost of your policy include:
- Your age
The older we are, the greater the risk of passing away during the term of the policy.
- Your current state of health
Those with severe health conditions, especially those which might limit life expectancy, will typically pay more for Life Insurance to reflect the greater risk the insurer is taking on.
- Your smoker status
If you smoke, you’re at greater risk of developing a serious health condition and so insurers will charge more.
- Lifestyle and hazardous activities
Lifestyle habits, such as regularly drinking more alcohol than is recommended, or participating in hazardous activities, could result in an insurer increasing the cost of your cover.
- Family history
Has any of your immediate family ever suffered a serious and/or hereditary illness that may impact you? If so, you may pay more for income protection.
You can use our Income Protection Calculator tool to get instant online quotes from the UK’s leading insurers including Aviva, Vitality and Legal & General.
Oliver did an excellent job in making the right recommendations. He's been very patient in dealing with my request and helping me choose the right product. Well done and thanks very much!Jayant Rampuria
Common Self Employed Insurance Questions
How much can I insure?
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.
How is it taxed? Is it a deductible business expense?
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.
Will a claim pay out when I need it?
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.
Legal & General
The above Income Protection payout statistics shouldn’t be used to make an exact comparison of insurers but rather to get a general understanding of payout rates across insurers as a whole.
Can self employed get unemployment insurance?
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.
Are contractors and directors of a limited company eligible?
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.
What are the main types of self employed insurance?
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.
Is it the same as Personal Accident Insurance?
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.
Make sure you get 'Own Occupation' cover!
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:
Claim if you are unable to work in your own occupation.
Claim if you are unable to work in any occupation you are qualified for.
Claim only if you are completely incapable of working.
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.
Occupation Definition Calculator
Make sure your Income Protection covers you in your 'Own Occupation'!
Too often individuals take out income protection without being fully aware of the incapacity definition on which their plan would pay out.
Will the plan pay out if I am unable to do my current job role? Or will it only pay out if I am unable to do any occupation?
If you do not already have income protection this tool should provide you with guidance as to what to look out for and to ensure you do not fall foul of a lesser occupation definition.
Independent Protection Expert at Drewberry Insurance
Compare Income Protection for Self Employed
Need Some Expert Advice?
We are here to ensure you and your family don’t miss out on financial security because appropriate self employed insurance was not put in place. Our experts our here to help provide you with the necessary information for you to make an informed decision.
If you need any help please do not hesitate to pop us a call on 02084327333 or email us at firstname.lastname@example.org. If you are still researching then you can use our calculator to compare self employed insurance quotes or have a look at the related guides below.
- We placed over £1 billion worth of risk with insurers for our clients in 2017
- We were nominated for Protection Intermediary of the Year at the Protection Review Awards in 2016, 2017 and 2018 and the Cover Excellence Awards in 2016 and 2017
- Our ethos is to provide the best possible service demonstrated by the growing number of 5-star rated reviews with 98% of our clients saying they would recommend us
- Tom and the rest of our insurance experts are frequently quoted in leading papers such as The Independent and Financial Times with a reputation in the media as an authority in our industry.
by Tom Conner, BSc, MPhil
Director at Drewberry
Related Self Employed Insurance Guides