Self Employed Income Protection provides you with a monthly income if you cannot work due to any accident or sickness.
The monthly benefit payments are designed to cover your core financial commitments such as your mortgage / rent, bills and food.
It is particularly important because individuals who manage their own business tend to have little or no sick pay and rely on the income they generate to survive.
According to consumer group Which?, Income Protection is the one policy every working adult should consider.
Income Protection for self employed professionals protects a proportion of your monthly earnings should you be unable to work due to any accident or sickness.
You are able to protect up to 70% 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:
Taking out cover with an ‘own occupation’ incapacity definition will make sure you’re protected if you can’t do your specific job role.
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.
As with all types of insurance, there are some blanket policy exclusions you won’t be covered for by most Sickness Insurance providers.
These are usually pretty standard exclusions, such as illnesses / injuries sustained:
Travel to certain countries may also be excluded, namely those areas with active internal conflict / threat of terrorism; countries and territories where the Foreign Office has advised against travel; and regions with active epidemic outbreaks.
What If I Have Existing Health Conditions?
When setting up your Income Protection policy we will help you complete a medical questionnaire where you will need to declare any medical conditions you have suffered in the past 5 years.
Depending on the severity of the medical condition the insurer is likely to do one of three things:
If an exclusion is applied to your policy you may be able to get this reviewed after a period of time where you don’t seek any advice, medication or treatment for that condition.
As experts in this field we have direct access to the underwriters at all the top UK insurers which enables us to discuss your medical situation with them and negotiate the best possible terms for you. If you need any help please do not hesitate to pop us a call on 02084327333 or email firstname.lastname@example.org
There are plenty of benefits to being self-employed and being your own boss. You can set your own hours and have the freedom to work as you please.
However, there are downsides as well, with one of the biggest being that you don’t get any sick pay.
One of the most common questions we get asked is whether the self employed can get statutory sick pay.
A worker employed full-time, on the other hand, is usually contractually entitled to 26 weeks of Statutory Sick Pay from their employer if they’re off sick. This is worth £94.25 per week. Many employers offer more than this as standard.
If you’re self-employed you don’t get this benefit. Instead, you’ll have to see if you can claim government incapacity support, known as Employment and Support Allowance. This starts at £73.10 for over 25s.
Although other government benefits are available depending on the severity of your illness, they’re rarely sufficient to replace average UK household expenditure of nearly than £600 per week in the financial year ending March 2018.
According to Drewberry’s Protection Survey,14.7% of the over-55s said they’d been out of work due to illness or injury for at least 6 months at some point during their career. That’s roughly 1 in 6 people.
Meanwhile, the Office for National Statistics recorded more than 2 million people as ‘economically inactive’ due to long-term sickness in the 3 months to December 2019.
Clearly, the risk of long-term illness and injury is higher than many people think, yet as a nation we’re underprepared for this eventuality.
This is why self employed sick pay insurance can be so important as those working for themselves have less government support than those employed and no employer funded sick pay.
Our 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 working people have less than £100 left at the end of the month after paying for the essentials.
With such a low level of savings and only minimal cash leftover for discretionary spending, it’s no wonder that people would struggle if they were out of work through illness or injury.
Unemployment Insurance is designed to protect employed workers from forced redundancy. It pays out a short-term monthly income (for a maximum of 12 or 24 months) if you’re out of work through no fault of your own.
Taking out Redundancy Insurance is not something we typically recommend for self employed individuals. This is because, even if they weren’t working, self-employed professionals are still technically employed by themselves and so would be highly unlikely to be able to make a successful claim.
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:
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.
You have three types of premiums open to you when setting up your sickness insurance:
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.
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.
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.
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.
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 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.
John runs an IT consultancy. In the last tax year John earned a gross salary of £120,000. After reviewing his monthly expenditure John took out Self Employed Sickness Insurance covering 50% of his annual earnings, totalling £60,000 or £5,000 per month.
He opted for long-term cover that would pay out this monthly benefit for as long as he may need it should he be unable to work and earn an income.
Making His Claim
2 years after taking out the policy, John developed cancer. As soon as it become apparent that he was not going to be able to work he spoke to his insurer.
At the start of the plan John selected a deferred period of 6 months as he had sufficient savings and retained profit within the business to see him through those first 6 months.
John submitted the claims paperwork, including the required medical evidence from his consultant and the insurer was processed the claim.
In total, John was incapacitated for 3 years. Over this period, he received 30 monthly payments of £5,000, totalling £150,000. This enabled him to meet his financial obligations whilst out of work and allow him to focus on his recovery.
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 2018 and show that 88.1% of all Income Protection claims were paid, with over £600 million paid out in total.
Below is a table of the top 5 providers by their claims payout rate.
Legal & General
In addition to the policy factors discussed above, there are a number of personal factors which will also have an impact when calculating the cost of your self employed insurance including:
To calculate the cost of Income Protection, we’ve assumed:
The quotes from our Income Protection Calculator below represent the cheapest policy that matches the above criteria from across the entire UK market.
Calculating the Cost of Self Employed Income Protection
For a company director it’s possible to take out Directors’ Income Protection covering gross salary and dividends. This is paid for by your company before corporation tax, but the benefit is taxed upon a claim.
For sole traders, a personal Income Protection policy is best. This is owned and paid for personally and not put through the your business accounts. As it’s therefore paid from post-tax income, the benefit is then paid tax-free.
With Business Income Protection Insurance, 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. This is because the benefit is paid back into the business almost like a trading receipt and then distributed to you from there, similar to the way a salary is paid.
This is particular popular with self employed contractors who work through their own limited company and know they will not be getting paid should they be unable to fulfill their contract due to any illness or injury.
With a personal plan it is possible to cover up to 70% of gross earnings. The payout from the policy will be free from income tax and national insurance contributions (NIC). Premiums are collected from a personal bank account and the benefit is paid back into a personal bank account.
It is very common for self-employed workers to set themselves up as a sole trader. With this set-up, it is most appropriate to take out a personal plan.
The monthly premiums should be paid from a personal bank account and the benefit would be paid back into 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 subtract 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 your cover.
The self-employed have a range of insurance options to consider to protect themselves alongside Accident & Sickness Cover. These include:
Self-employed jobs are often – although not exclusively – manual. Builders, plumbers and 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 self employed Income Protection and Personal Accident Insurance side-by-side reveals that they’re actually very different insurance policies.
Personal Accident Insurance is usually an inferior cover when compared with Income Protection.
When we’re asked which one is a better fit for a client, we’d almost always say to opt for Income Protection as the more comprehensive choice.
Independent Protection Expert at Drewberry
AIG is one of only a handful Income Protection providers to offer cover for individuals with type 2 diabetes. It is also willing to offer diabetics guaranteed premiums and will not exclude diabetes in its policy, unlike other providers.
Aviva covers all policyholders with an own occupation definition of incapacity and, if you choose to return to work in a different occupation until you are well enough to return to your pre-incapacity occupation, Aviva will top up your reduced income with Back to Work Benefits.
British Friendly gives access to its Mutual Benefits program, which provides rewards such as vouchers for high street shops, discounted fitness tracking devices, emotional support services and online legal services. It’s one of the few insurers that will cover pilots on an own occupation basis
Cirencester Friendly provides you with a range of additional benefits and services, including a hospitalisation benefit and a Friendly Voice service that provides you with a personal nurse that you can contact for advice and emotional support.
The Exeter is one of the few UK insurers that is able to offer own occupation cover to workers in higher risk occupations, although such policies only offer age banded premiums.
Holloway Friendly is a Friendly society founded by the original inventor of Income Protection Insurance, George Holloway. Unlike other income protection providers which offer monthly benefits, Holloway Friendly pays out benefits twice a month.
Legal and General includes a free life cover element that pays out a maximum of 12 times your monthly benefit if you pass away while the policy is in force.
LV offers free access to unique LV Doctor Services, which include fast access to remote GP services, second opinion services and private prescriptions for policyholders and their children up to the age of 16.
Royal London can include Fracture Cover, which pays out a lump sum of between £1,500 and £4,000 on top of any benefit you’d receive for being off work if you receive a fracture of a specified body part
Shepherds Friendly allows you to apply to suspend cover and premium payments under your plan for a minimum continuous period of 3 months and up to a maximum continuous period of 24 months. This is known as ‘Career Break’ option.
Vitality provides a unique offering. While the core of its policy is similar to other providers’ offering, it also offers a unique set of additional benefits to those who participate in the Wellness / Optimiser programs that can include policy discounts and rewards.
With fluctuations in earnings, limited companies and often a broad range of work duties it can be a bit of a minefield when setting up self employed insurance.
We are here to make sure you have all the information you need to make an informed decision and set-up the most suitable cover for your needs.
We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to let us help.
Income protection for self employed people can be a little more complex depending on how you pay yourself and whether you are working through a limited company.
If you need some help please do not hesitate to pop us a call on 02084327333 or email email@example.com.
Director at Drewberry
Martyn Coates from Drewberry provided an excellent service with prompt handling of any question that we asked him. I would highly recommend Drewberry for anyone wanting Insurance.