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Guide

Self-employed income protection insurance

A guide to life insurance when you’re self-employed.

Can you get income protection if you are self-employed?

If you work for yourself, you can apply for income protection. This covers you if you become ill or are unable to work due to an injury. You could receive a payout between 50% and 60% of your average income each month. This is usually tax-free.

To apply for self-employed income protection insurance, you must be self-employed. Either as a Sole Trader, Limited Company director or be in a Partnership.

You can then claim if you are unable to work due to illness or injury for a minimum of four weeks. Waiting for payment depends on your provider and agreed in advance. You then continue to receive the payments until you return to work or retire.

Why is income protection important when you are self-employed? 

Self-employed income protection insurance gives you peace of mind. It means that you will continue to receive regular monthly income due to illness. This is important because self-employed people don't receive sick pay.

If you don't have income protection insurance, it could mean you'll get less than you need if you fall ill. You would only be able to get the Employment Support Allowance (ESA). This starts at £58.90 per week for people under 25 or £74.35 for older people. If you have rent, mortgage payments or a family, ESA alone may not cover your costs while you are out of work.

Income protection means you can continue to receive an income. It would also cover for lost cashflow. Without the protection, you may risk going into debt or even have to close your business down.

What does income protection cover when you are self-employed?

The best income protection covers you for all illnesses that stop you from working.

Up to a million people per year find themselves out of work for weeks, months or even years because of ill-health. Self-employed income protection means you can focus on getting better.

The insurer will pay out to cover:

  • Rent
  • Bills
  • Mortgage payments
  • Living costs
  • Outstanding debts

Income protection insurance for self-employed people will cover most of your costs. But it is important to know what you can't use it for:

  • Business costs: Things like office space, your suppliers’ invoices, or employee salaries.
  • Your full salary: The payouts are lower than your full salary. Although you will not usually pay tax on payouts, the impact on your income may not feel so different.
  • Large debts: If you opt to receive payments in a lump sum, you often cannot use it to pay off large debts such as mortgages. The payouts are for regular monthly personal expenses.

You can claim ESA as well as income protection for self-employed people. Your insurer may adjust your payments if you are receiving ESA.

You may also be able to receive Universal Credit (UC) too. But, having insurance could affect the amount of UC you receive. It is always worth speaking to your insurance provider for clarity about ESA and UC when making a claim.

How does self-employed income protection work?

Self-employed income protection works by assessing your work, health, and personal circumstances. The insurer will then provide cover tailored to you, and you pay a monthly premium.

If you need to claim, your provider will assess your case then begin paying out a monthly payment. This can be up to 50% and 70% of your average monthly self-employed income. 

Things to consider when applying for income protection insurance for self-employed people include:

  • Policy cease age: This is when you expect to stop needing the insurance. It will be the age when you plan to retire.

  • Deferral period: The time between the first day you're unable to work, and when you receive insurance payments. Some people choose to receive payments immediately while others choose to defer payments. This can be the case if, for instance, they have savings that they would rather use first.
  • Payout length: Income protection usually covers you until you retire or can return to work. But, some people choose shorter payout lengths of a year or two, for a lower premium.

  • Sum assured: If your average monthly income is high, it will cost more to assure it than someone earning less. This is because the insurer will need to pay out more if you are unable to work.

  • Current age: The older you are, the higher your insurance premiums will be.

  • Medical history: Your personal medical history may affect the cost of your premiums.

 

What is the best income protection for self-employed people?

Choosing the best income protection for self-employed people will depend on personal circumstances. Here are some factors to consider:

  • Is another kind of insurance more appropriate?

    You could look into life insurance for self-employed people or critical illness insurance. These will also cover you for loss of earnings.

  • Do you need it?

    Some people have extensive savings or family who could support them. Others are young with no major responsibilities. In these cases, you may decide it is not necessary for you.

  • Could you survive on government benefits? 
    You may own your home outright or have very low outgoings. In this scenario, you may be able to get by on government benefits.
     
  • What kind of risks do you face? 
    You know yourself and your business best. Some people may do work or have lifestyles with low occupational risk. For example, a freelance graphic designer who works from home. Other self-employed people work in higher risk environments such as self-employed roofers. Anyone can get sick or injured, but you may choose a different level of premium depending on the risks you face.
     

 

Self-employed income protection FAQs

No. Income protection insurance is usually taken out by the business owner and you pay tax on it. Once it's been paid out, you don't need to pay tax on your new 'income.' But, if you had claimed it as an expense through your business, HMRC would want to tax you on your payout.

Monthly payouts are calculated using your business's pre-tax profits. Your insurer will likely base this on company filings or your most recent SA302. For example, imagine your profit in the last financial year was £40,000. The insurer might agree to pay out 60% of your average monthly income. In this case, they would divide £40,000 by 12 (for the 12 months In a year) then pay you 60% of that figure each month.
Most policies with income protection will pay out until you return to work or retire. But short-term income protection policy, will only pay out for a certain amount of time (such as one or two years).
This depends on the policy. In many ways, they are very similar. Both types of insurance cover you if you are unable to work due to sickness, injury, or disability. But, self-employed income protection insurance covers more reasons for being out of work. You should of course read your policy documents for more detail.