Self-Employed Income Protection

What is self-employed income protection?

Self-employed Income protection pays you a monthly tax-free sum in the eventuality you are unable to work due to an accident or sickness for a set period of time. It is a critical safety net for self-employed individuals who will not have the benefit of company sick pay as they do not have an “employer” as such and may also not have the protection of statutory sick pay and rely on their generated income for living expenses.

As such, self-employed income protection insurance in place protects you from being out of pocket during a difficult time and leaves you with one less thing to worry about.

How does self-employed income protection insurance work?

Self-employed Income protection insurance works in the same way as a standard income protection insurance policy. It will provide you with a regular tax-free income if you cannot work due to illness or injury, usually for a set period of time.

Income protection insurance for self-employed workers usually covers between 50% and 70% of your income that you have declared to the HMRC and will pay for a set amount of time specified at the outset of your policy.

Like most income protection policies, the monthly payment you receive from a self-employed income protection policy can be used however you choose, whether that’s for mortgage payments, bills or other lifestyle expenses.

As a self-employed person solely responsible for generating your own income, a drop to very little or no income can be a daunting prospect. Making regular monthly payments to your insurer for a self-employed income protection policy means that, if you need to make a claim, you are able to do so and receive a regular pay out in return.

Most self-employed income protection insurance policies only pay out for a specific period of time. The cover is broadly designed to help you when you’re facing a temporary health challenge, until you can get back to working again, and might pay out for a year, two years or up to retirement age for example.

Income protection is not to be confused with critical illness or life insurance, which are designed to pay out a significant lump sum to cover you for a much longer period of time or until you die, should you be diagnosed with a serious illness.

What affects my self-employed income protection policy?

There are several factors that might affect your self-employed income protection policy, such as:

• Income Coverage: Policies can cover from 50-70% of your monthly income, including dividend payments if you operate a limited company​​.
• Deferred Period: This is the period you must wait before receiving benefits after becoming incapacitated. The deferment period can significantly impact your premium, with options ranging from one week to two years​​​​.
• Policy Term and Type: You can choose between short-term policies, which provide coverage for a specific period (typically 1-2 years), or longer-term policies that extend up until retirement. The length of coverage will affect the monthly premiums.
• Occupation and Lifestyle: Your job and lifestyle choices (such as smoking or excessive drinking) will influence the cost of your policy, as some occupations and habits are associated with higher risks​​.
• Health and Pre-existing Conditions: Your current health and any pre-existing conditions play a crucial role in determining the coverage and cost. While many conditions may be covered, premiums may increase, or certain conditions may be excluded based on their nature and the insurer's policies​​.
• Proof of Income: as self employed customers may struggle to prove exactly how much they earn due to self assessments and length of time being self employed, some insurers offer “No proof of income” policies.

To ensure your policy meets your specific needs, speak to our income protection brokers. They can help you avoid potential issues and find the right provider.

How do I know what level of cover I need?

In order to determine the level of cover you need, you’ll need to assess your personal and financial circumstances. Ask yourself?

• What are your financial commitments?

Write down if you are paying any mortgage or rent, bills, and any other regular payments. Also include any debt repayments, foods, childcare, and other essentials.  Estimate how long you could cover these expenses without any income and think about the impact on your dependents. Be realistic.

• Do you have any savings or assets you could use to keep you afloat?

Assess any savings or assets you could use in an emergency and how long these could sustain your lifestyle. Be mindful to also consider whether you are willing to use them as a stopgap in the event you cannot work​

• Are you eligible for other types of support?

Are eligible for other forms of support like Employment Support Allowance (ESA) or Universal Credit? Aside from how they might support you in the eventuality you can’t work, some providers might adjust your payout.  

• What level of cover will give you peace of mind?

The payout duration varies, with short-term policies offering coverage for a fixed period (e.g., 12 months) and long-term policies extending potentially until retirement. However, your monthly payment will also largely vary depending on the level of cover you seek.

What does self-employed income protection generally cover?

Just like with income protection, you can choose how you want to use your payout, depending on your circumstances. The payout can be used to cover:

• Mortgage or Rent payments
• Daily living expenses, including groceries, fuel for your car, etc
• Utilities and other household bills
• Outstanding debts - small monthly repayments
• Childcare costs
• Maintaining other insurance policies
• Medical expenses

What does self-employed income protection not cover?

Although income protection insurance for self-employed people will cover most of your living costs, it can not be used for the following:

• Business costs: Things like office space, your suppliers’ invoices, or employee salaries.
• Your full salary: The payouts are lower than your full salary. However, as you won’t be paying tax on your payout, it may be close to your normal salary.

Do I need self-employed income protection?

• Income protection for the self-employed is one of the most important types of insurance to consider when choosing to work for yourself. Employment usually includes company sick pay or employee sickness insurance. Being self-employed means you need to think about how you would cope financially if you were unable to generate an income due to illness or an accident.

  There are approximately 4.33 million self-employed people in the UK and more than half are believed to have no life insurance, private medical insurance, critical illness cover or income protection in place.

  This means that self-employed people are often under much greater pressure to get well and back to work as quickly as possible. Policies like self-employed income protection are there to take that pressure away.

   

  [1]https://www.statista.com/statistics/318234/united-kingdom-self-employed/

Who is self-employed income protection for?

Income protection insurance for self-employed people is ideal for anybody who works for themselves or runs their own business, and means you could receive between 50% and 70% of your income if you were unable to work due to illness or injury.

What are the benefits of self-employed income protection?

• A monthly income to use as you wish until you return to work
• Peace of mind you can cover your bills if you are too ill or injured to work
• No need to dip into your savings to get by during a difficult time
• Tax-free benefit
• Choose a level of cover to suit your needs and budget
• Makes the jump from employment to self-employment less daunting

Self-Employed Income Protection FAQs

How long do self-employed income protection policies pay out for?

Like other income protection policies, self-employed income protection falls under two categories: short-term policies and long-term policies.

Short-term policies tend to only pay out for a maximum of 12 months, whilst long-term policies pay out until the end of the set policy term – often until retirement.

How much does self-employed income protection cost?

The cost of your self-employed income protection is based on a range of factors. These include:

• How much you want your monthly payment to be
• The likelihood that you’ll find yourself unable to work
• Your age
• Your lifestyle, including whether you smoke and exercise
• Your current levels of health and overall medical history
• The risk factors associated with the kind of job you do
• How long the ‘waiting period’ is before the policy kicks in

The best way to calculate how much cover you need is to add up all your debts including your mortgage, loans, credit cards and so on. Then add on any other expenses you’d need to cover like food and childcare. This will help you calculate what level of cover you should be looking to buy.

What about Unemployment Insurance for the Self-Employed?

Many self-employed people are interested in unemployment insurance. However, the qualifying criteria for unemployment cover are much stricter for self-employed workers. Many self-employed unemployment insurance policies state that the business must have been wound up through ‘no fault of your own’ in order for you to claim, and this can be difficult to prove.

One of our specialist advisers would be happy to explain unemployed insurance for the self-employed in more detail.

What is the difference between income protection and self-employed income protection?

Whilst some income protection policies require proof of income before a pay out is made, there are several self-employed income protection policies that don’t require this.

As a self-employed person you might not have the information you need to hand to be able to prove your income at the time you require a claim to be made. As a sole trader it might be difficult to show consistent earnings on a month by month basis, or you might not have been self-employed long enough to have completed a full tax return, for example.

There are self-employed income protection insurance providers which recognise that your income is more likely to fluctuate as a result of being self-employed, and there are policies available that will pay out a set amount where the client doesn’t have to prove their financial income in order to benefit.

Does sick pay for self-employed workers exist?

Sick pay for self-employed workers exists, but not in the form traditionally available to employees. Self-employed individuals, including sole traders, aren't eligible for Statutory Sick Pay (SSP). However, they may qualify for other forms of financial support such as Employment and Support Allowance (ESA) and Insurance Covers. 

Will a self-employed income protection plan cover my full income?

No. Self-employment income protection covers from 50%-70% of your income. However, the payout is tax-free so the money in your bank might not be as far off from your normal income as you may initially think.

Why should I use ActiveQuote to compare policies?

Rather than visiting each insurer individually, why not compare self-employment income protection insurance quotes with us now? Our comparison system allows you to compare income protection quotes online in minutes, and buy a policy straight away.

As you can see, there are many different factors that can affect the cost of your self-employed insurance and your cover. ActiveQuote is an FCA authorised broker with a team of expert advisers to help you choose between your self-employed income insurance quotes. Our team will also annually review your self-employed income protection insurance policy to make sure you are getting the right cover for the best price.

If you are self-employed you might also want to consider investing in a health insurance policy, which could allow you to avoid long NHS queues and receive medical treatment quickly and with a specialist of your choice.