Income protection for the self-employed

Income protection for self-employed people

There are many advantages to self-employment. As your own boss you answer to no one else, you can organise your work around your life, you have the satisfaction of knowing that your success is all your own and the money you make is yours too.

There are disadvantages too. You may not always have as much work as you’d like and all the pressure is on you to make your job pay. Only you can tackle these pressures, but there’s one big issue where someone else can help.

As a self-employed person you have none of the rights and benefits of an employee. That means if you can’t work there’s not much of a safety net. What happens if you get injured or fall ill and have to stop working? How will you pay the bills? Whether you work up a ladder or in front of a screen, the problem is the same. An employee might get sick pay from their employer, for weeks or months. It may only be the legal minimum of Statutory Sick Pay but it’s still more than you’ll be entitled to. So can you get income protection if you are self-employed?

The answer is yes. Self-employed income protection insurance can take the pressure off, both financially and psychologically, by stepping in with financial help when you’re forced to take an extended break from working.

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What does income protection do?

Income protection insurance pays you a proportion of your monthly income if illness or injury prevents you from working. You take out a policy while you’re in good health and working normally, then, if you get sick, you can claim on your policy.

What does it cover?

Income insurance for self-employed people covers you not for specific illnesses or injuries but for your inability to work. On the whole that means it will pay you if you can’t work, whatever the cause, physical or mental. There are exceptions – for example, you may not be covered for illness or injury resulting from certain dangerous activities or ones that are connected to a pre-existing medical condition. Apart from specific exclusions, you should be able to claim whenever a doctor can confirm that your illness or injury makes it impossible for you to work.

 What does it pay?

Income protection typically pays you 50%-70% of your normal pre-tax income in regular monthly payments. Eleos is on the upper end of the scale, at 70%. The 70% figure is roughly equivalent to the pay you would take home after deductions for tax and National Insurance. You don’t have to opt for the maximum – if you’re happy with a smaller proportion you’re perfectly entitled to choose it, and it will make the cost of your policylower.

Self-employment and income tax

As a self-employed person you’ll account for income tax through self-assessment. HMRC does not levy income tax on income protection payments, so although you may need to include any insurance benefits on your self-assessment tax return, you won’t pay any tax on them.

How long does it pay for?

When you take out a policy you choose your maximum claims period. With Eleos you can choose 1 or 2 years. That means when you make a successful claim you can be paid up to that maximum, if your illness keeps you off work for as long as that. If you are able to go back to work sooner, or your illness goes on for longer than the maximum, your payments will stop.

How do I take out income protection?

You can buy direct from an insurer, go through a broker or use a comparison website. However you do it, the mechanics of taking out a policy are essentially the same. You start by getting a quote, then, once you know what’s available you’ll go through a series of questions about your health and lifestyle to confirm that you’re eligible. After that you can complete the purchase of your policy.

The number of people buying insurance online is increasing every year. However, when it comes to the eligibility check, you normally have to do this on the phone with an agent from the insurer or broker. This puts many people off, so Eleos does it differently: the entire process from initial quote to acceptance and purchase takes place online, with no phone contact needed.

What to consider when buying income protection

The principle of income protection is simple but the practicalities need some thought. Here are some of the issues that are important to consider.

Waiting period

Every policy includes a waiting period. This is the time you agree to wait between making a claim and receiving the first of your payments. You choose the waiting period and the longer the period the lower your premiums will be. It may be that you want to start getting paid as quickly as possible, but if you’re entitled to sick pay for the first weeks of any illness it’s a good idea to time your waiting period to end when your sick pay stops so your income protection can take over.

Exclusions

Some illnesses and injuries – or more precisely their causes – will not be covered. These are standard exclusions. Examples are conditions that are self-inflicted or caused by taking part in prohibited dangerous activities. An insurer may also add what are known as personal exclusions. These will exclude cover for health conditions that you already have. Some insurers will agree to review these personal exclusions in the future, if, for example, you’ve been symptom-free of an excluded condition for long enough.

Waiver of premium

Most policies will not expect you to keep paying your premiums while you’re claiming and receiving benefit. Once your claim is over, you’ll resume your premium payments.

Definition of occupation

Income protection policies use three definitions to determine whether you’re unable to work. 

Own occupation – you’re unable to carry out your normal job

Suited occupation – you’re unable to do your normal job or another one suited to your skills and experience

Any occupation – you’re unable to work at all

Own occupation cover is the most expensive of the three, but it’s usually the most advantageous one, especially if you’re self-employed. If you don’t have an employer, your insurer might insist that ‘any occupation’ could literally mean any job that pays.

Health and medical history

You’ll need to disclose your current state of health, as well as your own and possibly your family’s medical history. If you don’t and the omission comes to light later it might mean any claim is rejected and your policy could be cancelled.

Career breaks

Some policies allow you to take a career break. This means your policy and your premiums are put on hold for a period when you feel you won’t need it. You won’t be able to claim during this period but your cover will restart at the end of the break without the need to reapply. Eleos policies offer career breaks of between 3 and 24 months.

Why is income protection important for the self-employed?

If you’re self-employed you’re well aware that your income may not be constant. An employee’s slow day in the office probably doesn’t affect their earnings but for you it could be a different matter. If there’s uncertainty about your income when you’re working, then how much more vulnerable are you when you can’t? Income protection for self-employed contractors, freelancers and others who work themselves may be the best solution. How else would you meet your expenses while you’re off sick?

Savings

If you’ve built up enough savings you could use these, but you can only spend that money once.

Loans

You could borrow to see you through lean times, but debts have to be repaid.

State benefits

Statutory sick pay isn’t available to the self-employed. Instead, you can claim Employment and Support Allowance (ESA), but currently this pays only £90.50 a week.

Universal Credit

You may be eligible for Universal Credit if you’re self-employed and too sick to work. It may affect the amount of ESA you receive.

For someone in your position, income protection appears to be an effective way of making sure your bills are paid and the essentials are covered while you’re unable to work.