Being self-employed has many benefits, but sick pay is unfortunately not one of them. If you work for yourself then getting ill is often simply not an option, because there will be no one left behind to run the business and earn you money. Unfortunately, even with all the best intentions your health is one thing you cannot control.
Consequently, for those who are self-employed, it can be a wise decision to invest in an insurance policy that will keep money coming in if you do become ill or have an accident. Here is our guide to finding an income protection insurance policy that will cover you if you are unable to work.
What is income protection?
Quite simply, income protection is designed to insure your income. Like car insurance and home insurance, if something goes wrong that is out of your control then your insurance company will pay out. An income protection policy will replace part of your income if you are unable to work because of accidental injury or sickness, something that is very important for those without sick pay. Your policy will pay you a tax free benefit every month which you can use however you like- to pay off your mortgage, your bills, or even your other insurance commitments- so you do not have to use your savings or rely on the government. So how do you go about finding a policy if you are self-employed?
Step 1) Decide how much of your income you need to cover
The first step when looking for a policy is to decide how much of your income you need to insure. Income protection will usually cover between 50 and 70 per cent your income. For the self-employed, your earnings will be calculated based on your share of the annual pre-tax profits. It depends on your own financial commitments as to how much you want to cover. The more you want to get paid, the more expensive the policy will be. For example, if you have a partner’s income to fall back on, you may want to cover less of your income to lower your premiums. However, if you have no other financial means then you need to take into account all of your monthly outgoings, like your mortgage, your credit card debts and other costs like food and school fees. To make a policy worth your while, see if you can find a policy that will pay you enough to cover all of these things.
Step 2) Think about long do you want to protect yourself for
With income protection, you can choose how long you want your policy to pay out for if you end up being unable to work. Policies usually fall under two types- long term and short term. Short term policies only pay out for a maximum of 12 months. Whilst these can be cheaper, it does mean that if you don’t recover within a year your benefits will stop regardless of whether you can get back to work. In contrast, long term policies will pay out until the policy ends, for example retirement age. These long-term policies offer the best level of cover, particularly if you are self-employed, because you will not have to get back to work until you are fit and healthy. Long term policies are sometimes more expensive.
Step 3) Is there a particular debt you want to cover?
One of the main reasons for taking out a policy is to cover the cost of a debt like a mortgage. You can choose to take out income protection that is actually tied into your debts, rather than paying you a general monthly benefit. However, these policies are usually short term, and thus will only pay out for a maximum of 12 months. Again, if you are still ill after a year you will still not receive any more money. Interestingly, these policies can be more expensive than income protection insurance that simply pays out a lump sum every month. If you do want to cover a particular debt then compare the two types of insurance side by side to see which better fits your needs.
Step 4) Think carefully about redundancy insurance
Some short term income protection policies will also offer cover for unemployment, like if you are made redundant. Whilst these are popular with people in employment, those who are self-employed will find it harder to get cover. Unfortunately, the qualifying criterion for self-employed redundancy insurance is much stricter than that for employed workers. Your policy may need your business to have been closed through no fault of your own, something that can be very difficult to prove! Think carefully about whether you really need unemployment cover and speak to a qualified broker if it is something you feel you need for more information.
Step 5) Compare the market
You have probably heard about the payment protection insurance scandal after thousands of people in the UK were miss-sold policy to cover their credit card debts against accident and illness. Since then, a great emphasis has been placed on shopping around for any income protection policy before buying one. If you are self-employed, make sure you research the marketplace fully to make sure you get the best deal and the right level of cover. A comparison website for self-employed income protection can be a great way to find suitable quotes from the different insurers in the UK.
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Author bio: Chloe Hibbert writes on finance and insurance for ActiveQuote.com, an income protection insurance comparison website.