In this guide to self-employed income protection, we'll explain exactly what it is and why you might need it, along with helping you understand key things like how much cover you might need and where you can buy it.
Income protection for self-employed people is an insurance product that provides you with a monthly income if you're unable to work due to sickness or injury. The monthly benefit payments are designed to cover your financial commitments, such as your mortgage or rent, utilities and food.
Typically, those who are self-employed don't have the protection of statutory sick pay in the event they are too ill or injured to work and because of that, they rely heavily on the income that they generate to survive. Without an income protection policy, self-employed people could quickly face financial ruin if they were unable to go about their daily business. It's for this reason that those who are self-employed should especially consider taking out an income protection policy.
While each provider will have its own products and terms we can give you a broad summary of what to expect.
- Cover up to 80% of your income - you can cover up to 70-80% of your monthly income.
- Cover dividend payments too - if you operate a limited company, you can cover dividend payments too.
- Choose when payments start - you can start receiving payments in as little as a week.
- Short and long term - you can either have shorter-term cover or protect yourself right up until retirement.
Income protection is a type of insurance policy that protects you if you're unable to work due to sickness or injury. If you're self-employed, it provides peace of mind that should something happen to you, you'd still be able to meet your financial commitments.
By making monthly payments to your insurer you are provided protection if you become ill or suffer an accident. Depending on the terms of your policy, in the event of a claim you could start receiving monthly payments in as little as one week.
Some self-employed income protection insurance policies are short term and will pay out for a specific period of time. These policies are designed to help you manage a temporary, short-term situation, such as not being able to work while a broken bone heals, and typically will give you 1-2 years of protection.
Longer-term policies are available too, with some covering you right up until retirement age, but as you can likely appreciate, the longer the payout period within the policy the higher the monthly premium.
There are a number of significant benefits of self-employed income protection insurance including:
- Depending on the terms of your policy, you'll receive a monthly income until you're well enough to return to work.
- You'll have peace of mind that should you ever fall ill or suffer an accident, your bills would be covered.
- You wouldn't need to use savings to get by during a difficult time.
- It's a flexible type of insurance and can be configured to your requirements.
- It provides some much-needed reassurance for those switching from employment to self-employment.
- Most illnesses and injuries will be covered with there being only a few exclusions.
There aren't any significant disadvantages of income protection as long as the policy has been set up to meet your specific requirements. The only time you might encounter problems is if the policy hasn't been created with enough foresight about potential future circumstances. With something such as self-employed income protection insurance, it's vital that you seek independent advice from a financial expert.
Aside from making sure the policy is set up correctly from the outset, the only other disadvantage is the monthly premium you'll need to pay.
There are numerous factors that will affect the cost of your income protection insurance policy, some you'll have control over and others you won't. Here we detail the primary things that you'll need to share with your insurer which will impact the cost of the policy:
- Your age - one of the most important factors which you have no control over is your age. Sadly, as we age, the probability of illness increases. Accordingly, the older you are when you start your plan, the more likely you are to pay more for income protection insurance.
- Amount of cover - how much cover you require, i.e. the monthly payout needed, will play a significant role in the cost of your income protection policy.
- Length of cover - you can choose between a short-term policy that covers you for say 1-2 years, or one that covers you right up until retirement. As you might expect, the longer the length of the policy, the higher the monthly premiums will likely be.
- Your lifestyle - if you lead a healthy lifestyle and avoid smoking and excessive drinking, then the cost of your policy will likely be lower as insurers know that those behaviours lead to higher rates of disease and illness.
- Your job - certain jobs are higher risk than others, office workers, for instance, will usually enjoy a low risk, but construction workers or those working at sea, will be at much higher risk of injury.
- Pre-existing medical conditions - if you have suffered from any medical issues in the past five years these will need to be declared to the insurer. They will then decide whether to cover those or not, and if they do, whether they will increase your premiums because of it.
- The deferral period - the period of time you need to wait before your payments begin is called the deferral period and as we've already mentioned, this can be as short as one week with some providers. This is an important element of your policy to consider - the shorter the deferral period, the higher the probability that you will need to claim and therefore, policies with the shortest deferral period will cost more.
Self-employment income protection is very comprehensive in that it will cover nearly any ailment you might suffer from, with only a few key exclusions. This is unlike other policies such as Critical Illness Cover which typically protect you from only very serious illnesses. If you're unable to work, even if it's caused by something as simple as a broken wrist, your income protection insurance should cover you. The only thing you need to consider is how the insurer defines incapacity in their policy wording. As we'll look at a little bit further in this guide, that definition has a material impact on both your level of cover and the cost of your policy.
As we've explained, there are very few limitations or exclusions to a self-employment policy, however, there are some standard exclusions on most policies that will result in claims being rejected. They are those involving or caused by:
- Self harm
- Criminal activity
- Illegal drug misuse
- Alcohol abuse
- Travel to foreign countries that the Foreign Office has advised against
- Travel to regions with active epidemic outbreaks
When you apply for a self-employed income protection policy, you may be asked to fill out a medical questionnaire in which you will need to declare any medical conditions that are either serious or recently diagnosed.
If you have any pre-existing conditions, whether it is ongoing or how recently the condition was diagnosed; the insurer will likely do one of three things for each and every condition depending on its severity, and the length of time since that has elapsed since its diagnosis.
- Provide cover for that condition on their standard terms
- Provide cover for the condition but increase the premium
- Exclude the condition from the policy
For example, a knee injury you recovered from 3 years ago with no ongoing issues is likely to be accepted with no exclusion, however if the same injury occurred in the last 6 months it is likely to be excluded, at least initially.
If you take out a policy and then go for a period of time without receiving any medical treatment for that condition, it is sometimes possible to get the exclusion or premium "loading" removed, but that will be down to the individual insurer to decide.
Crucially, when you take out a policy it is essential that you are honest about your medical history, not doing so could invalidate your policy or lead to a claim further down the line being refused.
As we mentioned a little earlier in this guide, insurers will typically choose a definition of incapacity to apply to your policy. It's important to understand what this means, as, depending on the definition they use your level of cover will be significantly affected. As we'll now explain, the best level of cover is own occupation, with the worst being any occupation/work tasks.
Own Occupation as a definition of incapacity is the best you can get from an insurer and as the name suggests, it means that the policy will pay out if you're unable to do your specific job role. As an example, if you're a senior director of a business and you need to take time off due to stress, the insurer wouldn't expect you to go back to work in a lesser role, you would be able to claim for as long as the policy lasts or until you're well enough to go back to your specific role.
Suited occupation is the next level down; with this definition, the insurer would expect you to return to work if, for example, there was another role you could take up that would be less stressful. Obviously, this could mean a significant change in your circumstances and income, so understanding this when you take out a policy is important. If your job is of a manual nature or higher risk this may be the only definition available to you.
Finally, the most strict level of cover, and the one which we tend not to suggest for many of our clients, is "any occupation or work task". Simply put, if you're capable of performing some fairly rudimentary tasks, such as walking, bending, hearing and climbing, you'd be expected to return to work, regardless of whether that means you'd be in a completely different industry or profession. Policies that are written with this definition of incapacity protect you from some of the most serious illnesses and injuries, and therefore don't provide you with many of the benefits that an income protection policy can afford.
Summary
So to recap, self-employed income protection is an incredibly important type of insurance that should be seriously considered by anyone who works for themselves. It is, however, a relatively complicated type of insurance and therefore seeking independent advice from a specialist is always recommended.
