Self-Employed Income Protection Explained

author image - crispin

By Crispin O'Toole-Bateman

on Monday 12 August 2019

Self employed shop worker opening shop with open sign

Self-employed people are willing to take the odd risk – it’s one of the things that makes them capable of taking the plunge to go self-employed in the first place, but when risk outweighs its value then it’s no longer a reasonable gamble and becomes recklessness.

With every month that passes, a self-employed person runs the risk that they are going to get ill or have an injury, and if that happens, it can be devastating.

The loss of income is complete and the struggle that follows can be incredibly difficult.

Eventually, all self-employed people need to look at some sort of income protection insurance.

What is income protection?

Employed workers are entitled, in the very least, to statutory sick pay (SSP), the government-supported scheme that guarantees some measure of financial protection if you are sick.

It’s true, SSP is horribly under-specified, providing less than £100 per week and offering assistance for only 28 weeks, but it is something.

By being self-employed, you are not entitled even to basic statutory sick pay in the UK.

Income protection for self-employed people plugs that gap.

It provides a regular salary-like payment each month that will cover bills and the mortgage payments while you are too sick to perform your job and build your business.

True, it doesn’t help with the difficulty in maintaining client relationships or keeping on top of things, but it takes away the financial worries of being sick and gives you the time and space you need to recover.

Can the self-employed get income protection?

The question seems a little redundant given this article’s focus, but it is a question that is regularly asked. Being self-employed can mean a difficulty in obtaining credit for the first few years, and so other financial services can also seem out of reach.

Thankfully, yes, self-employed income protection insurance in the UK is a standard thing and available to most.

But there are exceptions. Your job is going to be a major factor in determining your suitability for income protection.

Remember, the insurance company is hoping you don’t ever get sick enough to call on the insurance and that an injury is unlikely at best, thus the type of job that puts you in a risky situation is going to result in more rejected applications than one where you are sat in an office all day in front of a computer.

Sadly, this can cause problems for the very type of people eager to work for themselves.

Those in the construction industry, for example, are very often the kind of people to need self-employed insurance and yet are similarly a demographic highly likely to suffer a work-related accident or injury.

But even if you are turned away from basic income protection insurance packages, there are other self-employed injury insurance policies that might suit.

It’s important to call and discuss your needs rather than simply accepting a face-value rejection.

How much is self-employed income protection insurance and how much does it pay out?

Many factors go into calculating income protection insurance premiums – your line of work, your age, your health and, of course, the salary it is designed to cover.

It is possible to get income protection for as little as £10 per month, but the average monthly expense is closer to £60.

When it comes to paying, the best income protection for self-employed people allows you to dictate your required level of protection.

Unlike when on the pay roll and receiving a salary through PAYE, self-employed income protection is more flexible. That said, you should expect to set it at 70% of your pre-tax profits.

Personal insurance for the self-employed is tax-free, just as it is for standard employee income insurance, so that 70% should come very close to covering your entire take-home amount.

Can I claim income protection insurance as a business expense?

Is self-employed IP insurance tax deductible? It’s a complicated one!

Some accountants would advise their clients ‘no’ and leave it at that. Keep it personal and don’t claim income protection premiums as pre-profit business outgoing.

Others would suggest that it depends on the tax you are willing to lose should you make a claim.

When income protection insurance is a personal outgoing that you pay for out of your personal funds and don’t look to offset it against your tax, then the resulting payments made to you should you ever call on it are also tax free – identical to an employed individual covering themselves.

However, if you have claimed that the business is providing your income protection insurance as a sickness benefit, then anything paid out by the insurance company is a business income and considered ‘other operating income’, thus will need to be taxed accordingly.

You will also need to discuss this with your insurer to make sure the policy is written correctly. They may advise an alternative type of insurance, such as key man insurance as a replacement.

Do I need insurance if I am self-employed?

Only you can know your personal situation but ask yourself how you would cope if your income went immediately to zero and you were left in bed unable to work at all.

If the thought of the financial implications of that are too frightening to discuss, then yes, you need income protection insurance!

If your business can carry on without you and keep paying you a dividend, or you have amassed enough savings to see you through, then you might find income protection insurance an extra monthly expense you don’t need.

Is it worth getting income protection insurance alone?

Income protection insurance is one of multiple insurance packages self-employed people can take advantage of and, depending on your personal family situation, might be the most important.

Life insurance and critical illness insurance, the two other main forms of personal protection insurance, are better suited for large events that have major impact, but income protection insurance covers the shorter (yet no less significant) problems that can turn a positive building of a business and career into a financial disaster.

At Unite Life, we recommend a menu-like plan of all three types of life insurance, but if you need to make the decision to prioritise one form of insurance over another as a self-employed person, income protection can be the best decision.

More income protection advice and the cheapest quotes with Unite Life

Our advisors are experienced professionals who are available to discuss any aspect of income protection insurance with you. If you have any questions, don’t remain confused, simply contact us and get the answers you need.

For life insurance, critical illness cover, and all forms of income and sickness insurance, fill in our contact form or call us today!

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