Being self-employed has lots of benefits, including the flexibility to work on your own schedule, choose the projects you work on and control your income potential. But what happens if you succumb to an illness or injury that prevents you from working?
When you have your own business, you’re not eligible for statutory sick pay and you don’t have access to the sick pay benefits that an employee would receive. You still have bills to pay but may not have adequate savings to cover them while you’re unable to work. So the question is: can you get income protection if you are self-employed?
Can you get income protection if you are self-employed?
Yes, you can get income protection if you are self-employed. This gives you a financial safety net should you suddenly find yourself unable to work due to an illness or injury. Just a short time away from your business could have a significant impact on your income, let alone if you’re out of action for an ongoing period. Therefore, this type of protection can be a vital way to cover your expenses and remove the financial pressure while you concentrate on your recovery.
What is self-employed income protection?
Income protection is a type of insurance that provides a tax-free monthly payout if you’re unable to work because of an illness or injury. You can typically cover up to 50% to 65% of your net profit. You can claim as often as you need to within the policy term.
This financial protection covers a range of conditions, including illnesses that prevent you from working, physical injuries, including back problems and broken bones, and mental health issues. You can use it to help keep up with your mortgage payments or rent, utility bills, general living costs and ongoing business expenses to ensure your business stays afloat until you’re able to continue working.
Usually, you start receiving payments after a waiting period. This is known as the deferred period and it is agreed before the policy starts. The deferred period can be as early as 4 weeks after you’ve made a successful claim or as long as 2 years. The longer the period, the cheaper your premiums. Therefore, before taking out an income protection policy, think about how long you can realistically cover your bills before you need financial help.
Short or long-term income protection
You can choose between short- or long-term cover. If you opt for short-term cover, you’ll receive payouts for a limited period. These typically last for up to 2 years. This is the cheaper option but bear in mind that you may not have fully recovered when the payments stop.
Long-term cover, while being the more expensive option, ensures you’ll receive self-employed income protection payments until you either return to work, retire, the policy ends or you pass away. This is based on whichever of these happens first.
How much does self-employed income protection cost?
The amount you’ll have to pay for income protection will depend on the type of cover you want and your circumstances. The cost can be affected by:
- Your age: Premiums are usually cheaper the younger you are as the risk of falling ill or suffering from an injury increases the older you get.
- Your occupation: Riskier occupations increase the premiums payable. For example, if you work as a building contractor, your premiums will likely be higher than someone whose self-employed role is office-based, such as a freelance bookkeeper.
- Your health and lifestyle: If you have a pre-existing medical condition or you’re in poor health, such as being overweight or a smoker, you’ll pay higher premiums than if you’re healthy. If your lifestyle is considered risky, such as participating in extreme sports, your premiums will be higher.
- The deferred period: Your premiums are usually lower the longer you can wait before receiving your income protection payouts.
- The policy length: The longer you wish to receive payments, the higher your premiums will be.
- The level of cover you prefer: The more income you wish to receive each month after making a successful claim, the higher your premiums will be.
How is your self-employed income protection calculated?
If you’re a sole trader, the calculation is usually based on your net profit, rather than your turnover. If you’re a limited company director, the insurance provider will consider your salary and dividends. Typically, the provider will calculate your average income over 3 years and you’ll need to provide them with your business accounts or SA302s for this period.
Don’t worry if you haven’t been trading for that long. Some insurance providers offer income protection cover to those who’ve been self-employed for less than 12 months. Whilst a year of trading history is preferred by providers, our mortgage and protection advisers can review your situation and approach the right providers accordingly.
Put a safety net in place for your self-employed business
When you’re self-employed, you’re in a more vulnerable financial position than someone who’s an employee. You don’t benefit from an employer’s sick pay or have access to statutory sick pay. You may have savings to use but these can quickly dwindle if you’re unable to work for an extended period. That’s why income protection is an essential consideration when you’re self-employed.
Common misconceptions are that you don’t qualify for this type of financial protection when you’re self-employed or that it’s too expensive. Our mortgage and protection brokers are here to show you that’s not the case. They can discuss your circumstances and find the right protection cover for your needs and budget.
Providing you with impartial advice, they can also guide you on other types of protection available, such as critical illness cover and life insurance, if these are more suitable for your needs. Whatever your preferences, a policy can be tailored to provide the right type and level of cover for your circumstances. That way, you can be sure that your income is protected while you’re on the road to recovery.
Give us a call on 01322 907 000 to speak with our protection specialists and have peace of mind that you and your family can benefit from financial stability should you find yourself unable to work due to an illness or injury.