Partner Article

Self-employed income protection insurance advice

Going it alone and choosing to take the leap of faith to become self-employed comes with a lot of pros and cons.

The pros are quite obvious - freedom to plan your own day, no boss to have to answer to, more control, flexible hours and so on - whereas the cons are a bit more subtle: learning self-discipline, motivation, isolation, no financial safety net etc..)

There’s also the fact that you are now accountable for all your expenses and finances, such as income tax, national insurance contributions, pension etc…). Accountants and bookkeepers can help you with these of course, but you are still responsible for them.

Something many people who opt for self-employed status don’t think about is how this will affect their ability to access various insurance policies. Everything from life and health insurance to car insurance and home insurance can be affected by your new employment status. Perhaps the biggest issue regarding insurance is whether the self-employed are able to buy an income protection insurance policy.

Well, the good news is that yes, the self-employed CAN arrange income protection insurance – and is proven to be very popular amongst those who have branched out for themselves, only firstly you must be aware of a few key factors before you drop everything and rush off out to snap up a policy.

Below we aim to furnish you with the necessary info and general pointers as to what you can expect (and not expect) – in a purely self-employed capacity – to have included in a typical income protection plan, so as to help you construct a better picture before you rush into any hasty decisions.

As a quick recap though, let’s remind ourselves of what self-employed income protection is designed to offer the individual, across the board, prior to going into the whys and wherefores.

In a nutshell it’s there to provide the policyholder with a tax-free monthly income if they cannot work/need to take time off from their business due to an unforeseen accident or illness, and as such offers financial assistance with mortgage/rent payments, food and utility bills during the period where you’re unable to work.

Income protection policies are widely available for the self-employed

Depending on the type of income protection insurance you opt for, the more (or indeed, less) health conditions/medical implications come into play.

Take for example if the would-be policyholder plumps for short term income protection, for which a claim can be registered if the insured party suffers a broken arm or leg, sustains a transient back injury or experiences a bout of stress or depression.

Any of the aforementioned means that the policyholder will be temporarily incapacitated as such and will foresee a time when they will be able to return to their normal job of self-employed work.

Conversely, if the insured party decides to go down the alternative long-term income protection route, then ultimately this covers you against debilitating and recurrent/on-going health conditions (heart disease, cancer, etc…) which seriously compromise the policyholder’s ability to hold down their job for an indefinite passage of time; which could, potentially, last until they either retire or pass away as a direct result of the condition.

In most instances self-employed people select the long term cover option, and plans which habitually extend cover up to a pre-planned retirement age.

In the event of the policyholder being struck down with a serious health condition which eventually hampers their work to such an extent that they can no longer carry out their duties, then such a far-reaching plan has the wherewithal to pay-out monthly until the policy term ends.

As to the question of whether it’s advisable to take out self-employed income protection from the outset, then the answer would always be yes to our minds, as if you’re unable (physically or mentally) to generate the income required for your business to survive, then your livelihood will be placed in serious jeopardy.

Bear in mind that being self-sufficient from a vocational perspective means that you’re ineligible to receive statutory sick pay or any other employer-based scheme which financially supports the employee during a period of unpredicted inactivity.

Level of income protection cover required is based on profit, not revenue

So once you’ve arrived at the sensible conclusion that arranging a self-employed income protection policy is strongly recommended, you need to determine just which types and levels of cover apply to your individual employment circumstances.

Addressing the subject of level of cover first, it needs to be brought to your attention that should you be planning on operating your business in the guise of a sole trader then historically insurers will only entertain the idea of covering the proposer to the tune of between 50% and 70% of your business’s pre-tax profit.

In this instance the common mistake is for policyholders to wrongly cover a percentage of their revenue as opposed to the profit, and often wind-up over-insuring as an ill-advised consequence. However if you’re a director of a limited company the level of self-employed income protection cover is established from salary and dividends, while for those involved in partnerships the financial amount protected should be derived from the share of the partnership profits.

Elsewhere, and along with the aforementioned short term and long term income protection policies tailored around the self-employed policyholder’s needs, they could also elect instead to bag accident and sickness cover; which many non-self-employed workers tend to do in relation to various other walks of life.

Now the problem with this is that it’s all very well in principle if your business has been up and running for a while (realistically over 12 months), however if it’s a brand new venture then the chances are most insurers won’t offer you cover against the risk of lost earnings (due to illness or injury). Chiefly because you’re yet to accumulate any self-employed earnings history to base various factors and variables on.

What’s more, it’s advisable to box-tick the ‘own occupation’ section on any self-employed income protection plan, rather than just a run-of-the-mill general payment protection policy which for the most part are only justifiable in a ‘suited occupation’ cover sense and practice.

The longer the deferral period, the lower the premiums

Deferred period selection is also an important aspect of any income protection plan to consider from the off, which is essentially the perceived duration of time the policyholder would be able to manage prior to the policy kicking-in and the benefits being made available.

This is normally thrashed out between all parties at the negotiation stage, with some insurers known to promote a deferred period as short as a week for the self-employed, especially on account of them having no access to sick pay entitlement to tide them over in the interim.

Another area which remains open to interpretation between different self-employed income protection providers is that surrounding ‘unemployment cover’.

While numerous providers will willingly supply redundancy insurance in this instance, note that not all sing from the same hymn sheet regarding this. In many cases – and so as to instigate and subsequently facilitate any form of pay-out – the self-employed party might need to go as far as to declare themselves bankrupt, courtesy of the business/company assets being liquidized; and even then as long as it’s determined that the policyholder is exonerated of any blame in this winding-up order.

Despite a few grey areas which need ironing out between a would-be policyholder and self-employed income protection provider from the start, we’d ultimately go as far as to concur that it’s crucial for those people solely reliant on their own means to a financial end, not least due to the largely unpredictable nature of the employment beast, which could signal unheralded periods of financial instability and absences in preferred work patterns for reasons above and beyond the policyholder’s control.

Oh, and additionally it might be pertinent to also look into taking out a business expenses policy at the same time as signing up to income protection, as this covers office rent, vehicle and equipment/machinery leases, business premises utility bills, staff salaries, property taxes and telephone bills whilst the policyholder/self-employed business owner is otherwise incapacitated for an indefinite period.

This was posted in Bdaily's Members' News section by Bobatoo .