Being self-employed offers freedom, like being able to work the hours you want and to build something that’s truly yours. But here’s the catch: if you get ill or have an accident, there’s no employer to support you with things like statutory sick pay. Leaving you with help from the Government’s Employment and Support Allowance (ESA).
That’s why income protection is one of the most important types of insurance for people who are self-employed. But it can be often overlooked, so let’s took a look at why it matters.
Why you should think about income protection
No sick pay safety net
If you’re employed, you’d probably be a part of sick pay scheme from your employer, but when you work for yourself it’s a different story. If you can’t work, your income can just stop, sometimes overnight. Missing even a few weeks of pay can be stressful – and a few months could be devastating.
Statutory benefits are limited
Things like ESA are means-tested and often not enough to cover all your basics, especially if you’ve got rent, a mortgage, or a family to look after. Plus, it can take a while to get sorted.
Business costs keep coming
Running your own business means you’ve got ongoing costs – rent, equipment, vehicle leases, you name it. If you don’t have income protection, you might end up using your savings or, worse, piling up debt just to keep going.
Stay in control
The right income protection policy pays you a regular amount each month if you can’t work due to illness or injury. You can personalise it to fit your life, so you can keep things ticking over until you’re back on your feet.
So, what exactly is income protection?
Income protection is designed to pay out a monthly amount if you’re unable to work because you’re ill or injured. Usually, you can cover about 50–65% of your usual income (before tax). Most providers don’t cover your whole income, so you’ve still got a reason to get back to work when you can.
Before the payments start, there’s a ‘waiting period’ (called the deferred period) – this is usually four, eight, thirteen, twenty-six, or fifty-two weeks. The shorter the wait, the higher your premiums, but you’ll get paid sooner.
You can choose how long you want the payments to last – it could be one, two or five years, or all the way up to retirement age (like 65 or 68).
If you’re a sole trader…
Your insurable income is generally what you make after your business costs but before tax. Some insurers will also cover ongoing fixed costs that would continue if you’re unable to work. The policy is in your name, you pay the premiums from your own pocket, and any claim money goes straight to you.
If you’re a limited company director…
Your insurable income usually includes both your salary and any dividends you take. Even though you’re technically employed by your company, most income protection plans are set up for you personally. You pay the premiums (or your company can reimburse you as part of your pay), and if you claim, the money comes to you tax-free. There are a few policies where your company can own the cover and pay the premiums, but most people go for the simpler, more tax-friendly option of a personal plan.
Top tips for picking the right income protection
- A 13- or 26-week waiting period is usually a good balance between keeping costs down and not waiting too long for a payout. If you’ve got savings, going for 26 weeks could make your premiums cheaper.
- Try to cover at least your main household expenses and fixed business overheads. Don’t go overboard – if you try to insure too much, you might not get it all if you claim.
- If you’re younger, covering yourself up to retirement age (like 65 or 68) gives real peace of mind. If you’re older, or watching the pennies, a two or five year term could work for you.
- Consider inflation protection – you can get a fixed annual increase (say 3% a year) or link your cover to the RPI. That way, your policy keeps up with the cost of living.
How does tax or income protection work?
If you own the policy yourself, the premiums aren’t tax-deductible, whether you’re self-employed or a company director. But the good news is, if you need to claim, the pay-outs are tax-free. If your company owns the policy and pays the premiums, it’s a bit more complicated and the benefit might be taxed – most people stick with their own policy for simplicity.
Income protection might not sound exciting, but if you work for yourself, it’s one of the most important things you can have, to protect your lifestyle, your home, your business, and your independence.
