When you become self employed you no longer have access to insurance cover provided by an employer. If you become ill or have an accident and are unable to work then your income would cease or be severely reduced.
In this article, we describe how sick pay insurance works for those who are self employed or contracted with guidance on how to get quotes and up to £100 cashback at the end.
Why should the self employed or contractors consider income protection insurance?
Any reduction in income would not only affect your family's financial situation but also that of your business if you are unable to pay the monthly bills that still need settling.
It is therefore advisable for all self employed people to obtain income protection insurance (also known as self employed sick pay insurance or income replacement insurance). An income protection policy for the self employed will provide an income if you are unable to work due to long term sickness or as a result of an accident.
Income protection insurance for the self employed is one the most important insurance policies to consider if you are self employed or considering becoming self employed. Without a self employed income protection plan you will have to claim Employment and Support Allowance in order to pay all your bills.
How much will Employment and Support Allowance pay?
Employment Support Allowance is initially paid for up to 13 weeks after your claim. The initial payment is £67.20 a week if you are under 25 or £84.80 a week if you are over 25. These payments could rise to £129.50 a week after 13 weeks depending on your personal circumstances.
In contrast, self employed income protection cover would provide you with between 50% and 70% of your gross income, tax free although this varies between insurers.
How to work out if you really need self employed income protection?
If you are self employed, have dependents and do not have a significant amount of money in the bank then it is more than likely that you will need self employed income protection.
If you are unable to work due to illness or an accident then you would likely still require an income to pay your mortgage and other household bills. In addition there may be bills from your business such as staff wages, rent and utilities that will require settling every month which would put a greater financial burden on you and your family.
Whilst self employed income protection insurance is important there are other insurance policies that may be required if you and your family are to be fully protected.
Life insurance
Life insurance is the cornerstone of your family's protection arrangements. If you were to die then your family would not be able to continue with their current lifestyle as your income would die with you.
Critical illness cover
Critical illness cover is a long-term insurance policy that will provide a tax free lump sum if you were diagnosed with a critical illness such as cancer or in the event you had a heart attack or stroke. This type of policy is designed to pay off debts such as a mortgage or provide for alterations to your home or health care costs due to your illness. The important point is that critical illness insurance pays out upon diagnosis, even if you go on to make a full recovery.
Private medical insurance
This policy will provide cover for private medical treatment in addition to that provided by the NHS. Many self employed people find this type of policy useful as any treatment required can be carried out quickly rather than you joining the NHS waiting list, which could slow down your return to work.
Keyman insurance
Keyman insurance is a life insurance policy taken out on a key employee within the business and designed to protect the business financially if a key employee dies suddenly. As many self employed people are in partnership with others it is a worthwhile policy to have as part of your protection cover.
What’s the difference between unemployment insurance and income protection insurance?
Unemployment insurance is a short-term insurance policy that will provide an income for a period (typically 12 months) if you became unemployed or made redundant through no fault of your own.
Income protection insurance is a long-term insurance policy that will provide an income if you were unable to work due to illness or an accident.
What does self employed income protection cover?
Self employed income protection cover provides a long term monthly income if you are unable to work due to illness or an accident. The monthly income provided is selected at outset and will provide an income of between 50% and 70% of your income when you were working. The exact level varies between insurance companies.
The monthly income provided by an income protection policy for the self employed is based on your share of the pre-tax profits generated by your business.
Different types of income protection insurance
Accident & sickness only
This type of policy will pay a monthly income if you are unable to work due to illness or an accident. This type of policy is available for the self employed and often referred to as self employed sickness cover or self employed sick pay cover. It is usually only a short term solution and only pays for around 12 months.
This type of income protection insurance may not ask you about your health and instead, it may exclude all pre-existing medical conditions for you.
Unemployment only
This type of policy will pay a short-term monthly income if you become unemployed or redundant through no fault of your own. This is obviously not available to the self-employed.
Accident, sickness and unemployment
This type of policy will pay a monthly income if you become unemployed or redundant or are unable to work due to illness or an accident.
What is frequently excluded from self employed income protection insurance?
There will always be what is known as a deferred period with a self employed income protection insurance. This deferred period will range from 7 days to 12 months and is chosen at outset, the longer the period, the lower the premiums.
Once again, the amount of monthly income is limited to an amount based on your share of your businesses pre-tax profits.
Additional cover that can be added to a standard income protection cover?
Waiver of premiums
This is where the payment of premiums is waived whilst the insured person is off work.
Rehabilitation
Some insurers will provide help with rehabilitation to get you back to work sooner or pay part of your monthly income if you can only return to work part-time.
Critical illness cover
Some companies will allow a lump sum payment equal to the monthly amount payable typically over 12 months on the diagnosis of a critical or terminal illness.
Death
Some companies will allow life cover to be added to the policy.
How long would a policy pay out for?
The benefit term is chosen at outset and could be as short as 12 months, however, most people choose to insure up until retirement.
How much income protection insurance can I buy & how long are the policy terms?
The amount of benefit available is based on your pre-tax profits and the benefit term can be as short as 12 months or until retirement.
How much does income protection cost and how are the premiums calculated?
How much an income protection policy costs will depend on your circumstances, your health and the policy benefits chosen.
You can choose the duration of cover that you want. There are full term and short term options. The short term options are sometimes referred to as budget options.
Short term income protection
The benefit will start paying after an initial waiting period that you choose and will continue for up to a maximum of 1, 2 or 5 years for each claim that you make. You can make multiple claims as long as you return to work for a minimum time period specified in your policy terms which is usually 6 months to a year.
Full term income protection
The benefit will start paying after an initial waiting period that you choose and will continue for as long as it takes for you to be fit to return to work or until you reach retirement age.
Cost of short term income protection - will pay for a maximum of 1 year per claim
| Cover Type: | Age | Deferred period (waiting time from 1st day of illness to payment) | Monthly Benefit | Cover until age: | Monthly premium |
| Short term - 1 year | 30 | 4 weeks | £1,500 | 65 | £11.23 |
| Short term - 1 year | 40 | 4 weeks | £1,500 | 65 | £17.53 |
| Short term - 1 year | 50 | 4 weeks | £1,500 | 65 | £27.97 |
Cost of full term income protection - will pay for full duration of incapacity up to retirement
| Cover Type: | Age | Deferred period (waiting time from 1st day of illness to payment) | Monthly Benefit | Cover until age: | Monthly premium |
| Full term | 30 | 4 weeks | £1,500 | 65 | £35.79 |
| Full term | 40 | 4 weeks | £1,500 | 65 | £56.21 |
| Full term | 50 | 4 weeks | £1,500 | 65 | £86.63 |
The following factors may be taken into account when calculating the premiums:
- Age
- Occupation
- Current state of health and whether you smoke
- Level of income provided
- Deferred period
- Length of benefit term
- Benefits chosen
How to find the cheapest and best self employed income protection policy
The best way find the cheapest and best self employed income protection policy is to speak to an independent income protection specialist*.
We have teamed up with LifeSearch*, one of the leading UK providers of self employed income protection insurance. LifeSearch will compare the best self employed income protection quotes from a range of insurers in order to find the cheapest and best cover for your own personal circumstances. They will help to complete the application forms, chase the insurance company on your behalf and they have their own dedicated claims team, meaning they will help you out if you ever need to make a claim. Click the link above and complete the short form and they will be in touch right away for a no-obligation quote. Should you decide to take out a policy LifeSearch will also give you up to £100 cashback.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article - LifeSearch
