Can I get income protection insurance if I’m self-employed?
Choosing to go it alone and make the leap of faith to become self-employed brings with it a series of pros and cons. The pros being slightly more obvious (freedom to plan your own day, no boss to answer to, greater control, flexible working hours, etc...) than the cons (learning to self-discipline/motivate yourself, the isolation, removal of any safety net, nobody to pass the buck on to, it still feels like work, etc...)
And then of course there’s all your expenses and finances which you, yourself are solely accountable for dealing with (personal taxation, national insurance contributions, pension plan, health/life insurance policies); unless you choose to employ the services of a bookkeeper to calculate what you owe and moreover, what you’re owed. And then there’s the worry of whether or not you’re entitled to various insurance policies if/when you bite the bullet and spread your self-employment wings.
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.
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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.
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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.
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