Do you need income protection if you’re self-employed?

Income protection can be useful, but figuring out whether it’s right for you and finding the right policy can take time.

We explore the pros and cons of income protection insurance for the self-employed.

What is self-employed income protection? 

Income protection is a form of long-term health insurance.

If you can’t do your job due to sickness or disability, this policy can offer you an income.  

The amount you receive depends on your average income and policy, but it will usually be between 50% and 70% of your regular earnings. 

Your policy will keep paying out until one of the following happens: 

A) You reach the end of your policy term. 

B) You can work again. 

C) You pass away. 

D) You reach retirement age. 

Income protection policies are available to employed and self-employed people in the UK.

They can be crucial if you aren’t supported by an employer if you can no longer work.  

Do you need income protection if you're self-employed?

When contemplating whether you need income protection insurance, it's crucial to ask yourself a few important questions.

Imagine a scenario where illness or injury prevents you from working – could you still sustain yourself and support your loved ones financially?

Explore potential financial fallbacks, such as savings, to assist you during income disruptions.

Think about how you'd navigate through routine expenses like paying for your mortgage or rent, utilities, groceries, and other daily living costs.

Additionally, factor in the broader picture – not just supporting your loved ones but also ensuring the continuity of your business if applicable.

Can you claim sick pay instead if you’re self-employed?

Statutory Sick Pay (SSP) is not available to self-employed people, but if you’ve made enough National Insurance contributions, you may be able to claim Employment and Support Allowance (ESA). 

While your claim is being assessed, you can get up to £67.20 a week if you’re under 25 or up to £84.80 weekly if you’re 25 or older. 

When you’ve been assessed, you can claim up to £84.80 a week if you’re in the ‘work-related activity’ group or up to £129.50 weekly if you’re in the ‘support’ group. 

Unfortunately, most self-employed people find that ESA doesn’t cover their expenses, which is why income protection can be helpful. 

How do you find the best income protection insurance?

If you’re self-employed and overwhelmed by the number of insurance options, it might be worth speaking with a financial adviser.

They can guide you through your options and may have access to products that you can’t access directly. 

How much does self-employed income protection cost?

If you have a policy with a monthly benefit of £1,500 and a four-week deferral period, a self-employed 30-year-old would typically pay £35 a month, rising to £55 per month at the age of 50. 

However, costs can vary considerably depending on the following: 

• How much coverage you need, as determined by income. 

• How long you want your cover to last. Prices rise with term length, so a policy that runs until retirement will have higher premiums.
• How short you want your deferred period to be. Prices tend to drop as this period (how long after claiming until your first payment) lengthens. 
• Your age.
• Your health and any conditions.
• Your job and any risk factors. 

How much income protection coverage do you need if you're self-employed?

The amount of coverage you need from your income protection policy will be determined by how much you earn. If you’re self-employed, this amount can fluctuate. 

Insurers usually look at your pre-tax profits from the past year to figure out your average annual income to determine a percentage of your average earnings. 

What to consider before getting income protection insurance

There are many things to consider before deciding on an income protection policy. 

• Have you checked the wording of your policy to see what’s excluded? Insurers have different definitions of ‘able to work’ and ‘incapacitated.’ It’s worth reading each policy to make sure it’s right for you.
• Have you confirmed whether you need an ‘own occupation’ policy? Some policies only pay out if you can’t work in any field, while others are ‘own occupation,’ so they pay out if you can’t do your current job anymore.
• Do you have a plan for an unemployment scenario? Income protection doesn’t start if you’re made redundant or are fired, so you’ll need contingency plans for these scenarios.  

What are the alternatives to income protection?

Income protection insurance is often likened to critical illness cover. 

There are many differences between the two, the most important being that critical illness cover offers a lump sum, while income protection is an ongoing replacement for your earnings. 

If you’re hoping for a cheaper alternative to income protection and your mortgage is your primary monthly expense, it’s worth looking into mortgage payment protection insurance (MPPI). 

MPPI will cover a set amount each month for the policy’s length or until you return to work.

Unlike income protection, it is only intended to cover your mortgage (rather than replacing your earnings). 

What are the benefits of self-employed income protection?

• It’s a long-term form of income replacement that can keep you afloat when you’re unable to work for an extended time. 

• It provides peace of mind.
• There are customisable policy levels or stipulations according to what you need and how much you want to pay. 

What are the disadvantages of self-employed income protection?

• You’ll generally receive 50% to 70% of your earnings, so it may not cover all your expenses.
• Even if your income fluctuates, you’ll be constrained to your average earnings over the last year in terms of how much you get. 

• There will be limitations and exclusions, so there’s a chance that if you develop a health condition, you may not be covered. 

If you want any advice about the best income protection insurance for your needs, Unbiased can connect you with an independent adviser.