Can you get income protection if you are self-employed?
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Can you get income protection if you are self-employed?
Can I get income protection if I’m self-employed?
Yes, you can. Income protection can depend on what you do, as it’s risk-related. Some providers weight their premiums based on your job type. If you work at a desk all day, you’re unlikely to injure yourself at work, so you could potentially get a cheaper premium.
But a fireman, professional sportsperson or scaffolder would have a higher risk of injury. A provider that doesn’t price a policy based on job type would suit these types of people better. Standard providers might not even cover these instances, or a policy would be so heavily loaded because of the risk, it would cost a fortune.
Being self-employed isn’t necessarily more risky, unless you work in certain trades. Ultimately, you can get income protection.
Income protection pays out a monthly benefit if you’re too ill to go to work and you’re signed off by a doctor or consultant. The monthly amount is pre-agreed at the start, and could go up with inflation.
It will pay out after a certain period of time, called a ‘waiting period.’ That could be as little as a week, or one, three, six or 12 months, in line with how long you could survive before you would need it. The longer you can wait, the cheaper the policy.
We can go up to age 70 with long-term income protection, while other policies will only pay out for a couple of years. That’s still better than nothing, and much cheaper. It all depends on what you do, your budget and what you need.
Do you need income protection insurance if you’re self-employed?
Well, if you’re self-employed and you have an accident or become ill and can’t go to work, is anyone else going to pay you? If not, you need income protection. I can’t put it more simply than that.
What would happen if you can’t work for a year, or two or five – or ever? If you’re self-employed, your income is wholly reliant on you doing a particular task or service. If you can’t do that, income protection is the only pay you would get – so yes, you need it.
What is the most suitable income protection for self-employed people?
It depends on a lot of things – what you do, how old you are, if you smoke and if you’ve got any health conditions. That’s why we make a recommendation for each individual. Even if you’re employed, young, fit and healthy with no medical conditions, you need to get advice on these products.
You can get basic life cover by buying direct, but not income protection. Getting advice is key.
How is income protection calculated for the self-employed?
It’s all about your income, whether that be salary and dividends for a limited company director, or net profit for a sole trader. Essentially, income protection providers don’t want you to be better off financially being ill at home than at work.
So, they’re not going to pay you 100% of your annual profit. But you’re not going to be too much worse off with income protection, and some providers also offer a different maximum cover than others. It’s all based on your income – usually around 60% to 65% of your net profit figure, with no tax to pay.
How much income protection do you need when you’re self-employed? Can you get 100% income protection? What’s the maximum benefit of income protection?
You need as much as possible, really. But you can’t get 100% for the reasons I said. You’ll end up with about 60% or 65%, depending on the provider. That’s based on your net profit, on which you’re going to pay tax.
If you’re ill and in receipt of that payment, chances are you’re not going to be spending as much money on going out and entertainment. People generally find it’s enough.
It’s important to review your cover periodically, because if you took out a policy 10 years ago based on what you were earning then, and now you earn twice as much, your cover needs to increase. We can also index link it, as well, so that it goes up with inflation.
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How much is income protection a month?
It’s going to depend on who you are, what you do, how old you are, whether you smoke, how healthy you are and what your job is.
When I first started doing this, it used to be slightly cheaper for women. But then gender-neutral pricing came in and now it’s all the same.
For some people it might cost £25 a month, for others it might be £250 – it completely depends on your situation and how much cover you have. £1000 a month at age 25 when you’re fit and healthy will barely cost you anything. If you’re 45, overweight, diabetic, a smoker, or a scaffolder, the same cover will cost you more.
We work to your budget and priorities. We get what we can for people for an amount they’re comfortable spending.
What are the pros and cons of income protection for the self-employed?
I honestly can’t see any cons. There’s the cost, I suppose, but everything costs money, doesn’t it?
Hopefully, you get to age 70, retire, everything’s paid off and you live a long, happy life with no mortgage. Ideally, your income protection policy will have been a waste of time and money. That’s where we all want to be – it means you’ve been fit and healthy throughout your life.
Income protection is there when that’s not the case and you need some help, because something’s happened.
As I said at the start, unless you’ve got someone else to replace your income if you can’t work, then you need income protection.
Can I claim self-employed income protection insurance as a business expense?
This is more of an accountancy question – but yes, potentially. In this case, most providers call it ‘executive income protection.’ If you have a company, you can have this policy and run it through as a business expense.
But I think it’s viewed as a benefit in kind, so you may pay some additional tax. It’s an option, though, as long as it’s a certain type of income protection.
How long will my self-employed income protection insurance policy pay out for?
In an ideal world, everyone would have a long-term income protection policy that pays out until age 70. Because then if you can never go back to work, you don’t need to worry.
It would be index-linked, so it would go up with inflation until age 70. That’s the dream scenario.
However, if your budget doesn’t allow for that, there are lower cost options to consider. You could still be covered until you’re 70. But in the event of a claim, a cheaper policy could pay out for a year, two years or five years. Something is always better than nothing. A two-year payout is certainly going to buy you some time.
You might potentially have a critical illness policy alongside your income protection. And obviously if you have cancer, your critical illness will pay out, but your income protection is also going to give you an income while you’re ill.
A payout for a couple of years might be fine in that instance, because hopefully you’ll get better.
If I don’t earn the same salary each month, how will my income be protected?
It’s all about your annual income – it doesn’t matter about the monthly amount. We look at your P60 if you’re employed or your net profit from your tax calculation if you’re self-employed. That’s what the provider will base it on.
How can a mortgage broker help here? Is there anything else you’d like to add?
Protection is a big subject. In fact, it’s too big a topic for me to cover alongside mortgages, so we separate the two in our business.
Our brokers focus on the mortgage, and we also have protection advisors, because there are so many different providers and so many medical elements to consider. They put together a recommendation based on your needs and your budget, that does what you want it to do.
It’s so important to work with proper providers with good payout rates and claims histories – the big ones that you trust. Don’t just get it online.
We don’t charge for protection advice and most brokers don’t. You end up getting advice and someone there to help you if things go wrong. We help people with their claims, too, and sadly we’ve had a few in the last 12 months. It’s not nice, but that’s why we do it. That’s why we’re here.
Key Takeaways:
- Income protection is available to the self-employed and is essential, as your income is wholly reliant on your ability to work.
- The monthly benefit is calculated based on your annual income (net profit) and is usually limited to 60% to 65% to ensure you are not financially better off being ill than working.
- Policy premiums vary widely and are highly dependent on factors like your age, health, and job type, as they are risk-related.
- You can choose a waiting period before the policy pays out – the longer you can wait (from a week up to 12 months), the cheaper the policy will be.
- It is critical to seek advice from protection advisors, as income protection policies cannot be bought directly, and they can help tailor a policy to your needs and budget.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
For specialist tax advice, please refer to an accountant or tax specialist.
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