Choose your own hours, be your own boss, achieve greater job satisfaction and work-life balance; there are many reasons why people choose the self-employed life. But if you do, it’s important to make sure you’re aware of the inevitable risks you face in doing so too – particularly financial.
Not only can your finances become a bit less predictable if you’re self-employed, but you also forsake the financial benefits that come with being employed under PAYE – namely: sick pay, holiday pay, and other employee benefits. This means you need to be savvy about making sure you find other ways to support and protect yourself financially.
Building up a financial cushion is one way of doing this – making sure you’d be able to keep up with the cost of life while you’re between jobs or contracts, for example. Another way is by protecting yourself with insurance, in case something unfortunate happens. Income protection in particular is a sensible choice of cover for self-employed people. This is because it protects you if you become unable to work for a long time due to an illness or injury – the financial consequences of which could be catastrophic, especially if you don’t get any employer sick pay or have enough in savings to tide you over.
What is income protection and what does it cover?
Income protection is an insurance policy that pays you a monthly amount if you can’t work for medical reasons – physical or mental, illness or injury. You can usually cover up to 55% of your pre-tax salary, which should be enough to help you keep paying for essentials like your mortgage/rent, bills and food if you can’t work. People typically claim on their income protection policy for things like long-term back pain, serious injuries caused by accident, and depression, as well as serious illnesses like cancer, heart attack or stroke.
Different types of income protection
There are two main types of income protection: long-term and short-term. Long-term income protection keeps paying until you’re well enough to return to work, whenever that may be, or until your policy ends. Short-term income protection covers you for a shorter, fixed amount of time: usually 1, 2 or 5 years. Long-term cover is more expensive than short-term cover, but covers you more comprehensively.
How income protection policies pay out
All income protection policies pay out a monthly amount – the idea being that it replaces part of your missing income, helping you to cope with the ongoing cost of life. How much your policy pays out depends on what cover you buy; when it starts paying out after you become too unwell to work depends on the waiting period you choose when you buy the policy; and how long it will keep paying for depends on whether you have long-term or short-term cover.
How much income protection costs
Lots of factors determine how much income protection costs, including how much cover you want to buy and what waiting period you choose (the waiting period is the amount of time you wait before starting to receive payments if you make a claim – all income protection policies have one). All of the following factors will also be taken into account by the insurer: your age, job, smoking status, lifestyle, and personal/family health history.
Income protection policy exclusions
Income protection only pays out for loss of income caused by medical reasons – so unemployment for any other cause would be excluded. Your policy may have other exclusions that apply to everyone (e.g. inability to work because of self-harm) or exclusions that apply only to you (added to your policy during the underwriting process, based on your unique health history).
What’s the difference between income protection and unemployment insurance?
Unemployment insurance is sometimes described as a ‘type of income protection’ – but there’s a crucial different between the two. Unemployment insurance also pays out if you’re made redundant, which income protection does not. Unemployment insurance often pays out for a shorter amount of time than income protection too: usually up to a maximum of a year.
Why should self-employed people consider income protection?
The main reason the self-employed should consider covering themselves with income protection is because, unlike employed people, they don’t tend to have sick pay. This means that as soon as you become too ill or injured to work, you stop receiving any income – which can have an immediate, significant, and long-lasting financial impact on a person or household. If you’re self-employed, income protection gives you the peace of mind that you’re protected against this risk.
How do I work out if I need income protection myself?
Working out whether or not you need income protection yourself depends on your personal circumstances. These are the kinds of things you need to consider to help make up your mind:
- Do you have ongoing financial commitments you’d need to keep paying even if you couldn’t work – like a mortgage or rent? How long could you cover them yourself without extra support?
- Do you have any other people relying on your income – like a partner or children? How would they be affected if you lost your income because of a long-term illness or injury?
- Do you have any savings or other assets you could use to support yourself if you were too unwell to work? If so, how long would they keep you going – and would you even want to use them at all?
How do I find the best income protection for the self-employed?
There’s a few things it’s good to look out for in an income protection policy if you’re self-employed. We’d recommend you:
- Get a policy with a minimum benefit guarantee
This means the amount paid out each month if you need to claim will never fall below an agreed amount. If you don’t have this guarantee, the amount paid out could fall if your income falls – which can easily happen from time to time if you’re self-employed or working in the gig economy. A minimum benefit guarantee means you’ll always have a good level of protection even if your income fluctuates.
- Get a policy without minimum hours restrictions
Some income protection policies require you to have been working a minimum number of hours per week for you to be considered ‘employed’. The insurer might not pay out if you don’t meet the minimum number of hours. Again, this could be problematic for self-employed or gig-economy workers, as working patterns can fluctuate – so it’s best to look for a policy without these restrictions.
- Get a policy that doesn’t penalise you harshly if you’re unemployed when you become ill or injured and need to claim
Look for a policy that will still pay out in the same way if you’re unemployed when you become ill or injured. Some policies will make allowances for this for up to a year after losing your job, making no changes to the way your claim is assessed. Again, this is of particular use to the self-employed, who may well be between jobs or contracts at the point of needing to claim on their income protection.