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There are around 4.31 million self-employed workers in the UK according to recent government figures. If you are among them – and therefore without employer-based sick pay – being unable to work will have a devastating blow on your household’s finances.
Income protection insurance can offer a valuable safety net in these circumstances. It pays out to cover a proportion of your monthly income if you’re unable to work for specific reasons.
Our guide explains how income protection works if you are self-employed.
What is self-employed income protection?
Self-employed income protection insurance is a policy that pays out a tax-free monthly income if you can’t work due to a serious or long-term illness, the onset of disability, or injury. It covers a portion of your usual monthly net income, typically 50% or 65%, for example.
Income protection is available to employees as well as the self-employed, but it can be especially important for the latter as they do not have employer-funded sick pay, which many company employees may receive.
When you take out income protection insurance, you pay a monthly premium based on a range of variable factors, including the amount of cover you need, your age and state of health, whether or not you’re a smoker, and also the nature of your job, or type of work.
You can usually claim on an income protection policy multiple times while the policy is in force. And the policy won’t end because you have made a claim.
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When does income protection pay out?
Policyholders can claim on their income protection cover if they are unable to work due to illness or an injury or disability.
There will usually be a ‘deferral period’, which can range from around one month up to 12 months. This is the waiting time before you start to receive the monthly payments after you’ve made a claim. The longer the deferral period on the policy, the lower the premiums will be.
What can I use the payout for?
The monthly income payments from income protection insurance can be used for whatever you need, such as paying your mortgage or rent, loans and credit card payments, covering household bills, food and other costs. Policyholders can choose how the money is used.
How long does the cover pay out for?
This depends on your policy as the terms will vary between insurers. But some income protection policies will continue to pay out a monthly income, if you’re unable to work and qualify for a payout, until you die or reach retirement age.
Other types of income cover might pay out for a set period of time, for example you might take a policy out over 10, 20 or even 30 years for example, so the monthly payments would end when the policy term ends even if you have not been able to return to work.
Types of income protection
Income protection insurance providers tend to offer three main levels of cover:
- Own occupation: Cover that pays out if you can’t do your own specific job and role. This tends to be the most expensive type of cover, but it is more likely you’ll make a successful claim
- Suited occupation: This pays out if you can’t do your own job or a similar type of work. The policy won’t pay out if the insurer thinks you’re able to do a job to which you are suited (based on your level of qualifications and experience)
- Any occupation: This is the lowest level of cover and so often it’s where premiums are cheapest. However, it will only pay out if you’re not able to work in any job (the insurer may use an ‘activities of daily living’ test to see if you can do basic tasks, such as getting dressed, walking and climbing stairs). For this reason the bar is quite low for work so many people find it difficult to get a successful payout.
How much does self-employed income protection cost?
What you’ll pay in premiums for self-employed income protection insurance will depend on a range of factors that are specific to you. Insurers base their pricing on:
- Your age: The risks of certain illnesses increase as you get older
- Your occupation: Different types of jobs will be ranked by their risk with more physical jobs, such as those involving manual labour being viewed as more risky (higher likelihood of a claim)
- Your state of health: Health and lifestyle factors, or any pre-existing medical conditions, will push up the cost of cover
- Smoking: Smokers and vapers are likely to pay more due to the increased risks of certain serious illnesses linked to smoking
- The level of cover: The amount of monthly cover you want, and what proportion of your monthly income you want to cover (50%, 60% or 70% for example) will dictate the price you pay for the insurance. More generous cover will cost a lot more
- The type of income protection cover: Premiums will vary depending on whether you want cover for your ‘own occupation’, ‘suited occupation’ or ‘any occupation’.
It is important to note that with income protection policies the premiums will either be guaranteed or reviewable.
- Guaranteed premiums offer certainty for the policyholder that the cost will remain fixed for the duration of the policy
- With reviewable premiums, the cost is likely to be increased by the insurer over time.
Guaranteed premiums will tend to be higher at the outset, but policyholders are buying the peace of mind that the premiums won’t rise in future.
What else does income protection cover?
As well as paying out a tax-free monthly income if you’re unable to work and you have an eligible claim, income protection can have a range of other benefits, depending on your policy.
These might include:
- Making multiple claims. Policies typically stay in force even after a claim and once you have returned to work, so you can claim again if necessary. In some cases the deferral period is waived if you are unable to work again within 12 months of a claim (so you wouldn’t have to wait for the payout)
- Hospital benefit. Some policies pay out if you have to go into hospital, sometimes even if this is during the usual deferral period on the policy
- Payments on return to work: Many income protection plans will continue to pay out even after you’ve gone back to work. This might be where you’re on reduced hours, for example, due to a phased return after illness. The monthly payouts from the policy may be reduced and used to boost your monthly pay until you are back at your full or normal pay rate.
It’s important to read the small print of your policy before you sign up to find out what, if any, other benefits are attached to your cover. Income protection policies can vary in cost and in the cover they offer, so comparing different plans first can help you make your decision about the right cover for your needs.
Do I need income protection cover if I’m self-employed?
Income protection cover could be a valuable insurance policy to have if you’re self-employed.
While employees, particularly workers in big companies, are likely to get some form of paid sick pay from their employer (some larger corporations might pay up to 12 months sick pay for example), if they are unable to work for a period of time, this is not usually the case for those who are self-employed.
It means that unless you have significant cash savings you can access, or other assets you can sell to free up the cash to live on, you are likely to struggle to meet all your financial commitments, paying bills and buying food for example.
Plus if you have been injured or you’re unwell and can’t work this is likely to be a particularly stressful time. Adding money worries on top can make things even more difficult and could hinder your recovery. This is why income protection can be a lifeline for the self-employed and their families.
What is accident, sickness and unemployment cover?
Accident, sickness and unemployment insurance cover (also called ASU) is a lower cost, short-term insurance plan which can replace a proportion of your income for a short time, typically up to 12 months or two years, for example, if you’re unable to work for one of these reasons.
There will usually be a deferral period before payments are made following a successful claim. This might be three or six months, for example.
ASU cover tends to be cheaper than income protection or permanent health insurance and it does not require full medical underwriting (so there are likely to be fewer questions when you apply for cover).
Frequently Asked Questions (FAQs)
How much income protection do I need?
When weighing up how much income protection cover to get you need to look at your monthly net income and your financial commitments or outgoings.
You can usually purchase a policy to cover a proportion of your income, the maximum might be up to 65% or 70%, for example. But to get the maximum level of cover could be expensive with high monthly premiums, so you’ll need to balance this with your budget.
If you have sufficient cash savings set aside you may feel you could cope with a smaller monthly payout. In this case you could insure a sum, such as 50% of your monthly income, that would cover perhaps just your main outgoings, such as the mortgage and household bills, for example.
Are income protection insurance premiums fixed?
There are different types of income protection policies available and if you want your premiums to remain the same throughout the term of the policy then you can get guaranteed premiums that are fixed.
But bear in mind this also means any payout value is also fixed and won’t take into account inflation over time.
For index-linked benefits you would need to take out a policy with reviewable premiums, which are likely to increase by at least the level of inflation each year. But your payouts would also increase in line with inflation.
Will income protection cover pay out if my business goes bust?
No. Income protection insurance for self-employed people does not include cover for loss of earnings due to problems with your business, clients or customers. You also won’t be able to claim if your business goes under.
Will I get a payout if I die?
Some income protection policies do include a small amount of life cover as part of the plan. So, for example, you might receive two year’s worth of premiums as a lump sum if you die. But this is not standard on all income protection policies, so read the small print of your cover to find out if any life cover is included.
For more comprehensive life insurance it is important to shop around to find cover at the lowest premium.
