Self-employed income protection

Being self-employed can have many benefits, including flexibility and tax breaks. But as your own boss, you don’t have access to traditional employee benefits. That’s why you might want to think about income protection. 

Read our guide to income protection insurance for self-employed people and compare your options to find the right deal for you.

Being self-employed can have many benefits, including flexibility and tax breaks. But as your own boss, you don’t have access to traditional employee benefits. That’s why you might want to think about income protection. 

Read our guide to income protection insurance for self-employed people and compare your options to find the right deal for you.

Kara Gammell
Finances expert
minute read
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Posted 18 OCTOBER 2021 Last Updated 10 MAY 2022

What is self-employed income protection? 

Many self-employed people and contractors worry about the consequences of an accident or illness preventing them from working, but too few are taking steps to protect themselves from any loss of earnings if they are unable to work. Income protection insurance helps you recoup some of your lost earnings if you’re unable to work due to illness or injury. With this type of cover, you can get regular payments of a proportion of your average income. So instead of worrying about keeping your head above water, you can focus on getting well and back on your feet. Many people wrongly believe they’re not eligible for income protection but consulting a financial adviser can help you find a policy that best meets your needs.

You can choose between short-term and long-term cover. With a short-term policy your cover will last for a set amount of time. If you need to make a claim, you will receive payments until you can either return to work or the policy ends, whichever is sooner. With long-term income protection, you’ll continue to receive pay-outs until you’re able to return to work or you reach retirement age.

Why self-employed income protection matters 

According to the Office for National Statistics, by the end of 2021, the number of self-employed people in the UK was 4.2 million. That’s around 14% of all employment in the UK. With so many people now working for themselves, it’s vital they’re protected if they become unable to work. 

While being self-employed can have many benefits, you don’t have the same employee rights as PAYE workers – and that includes statutory sick pay. As a self-employed worker, you may be able to claim an Employment and Support Allowance to help with living costs if you have health issues that prevent you from being able to work. 

Adults aged over 25 could receive a maximum of £117.60 a week  depending on their circumstances. That could well be a drop in the ocean when stacked up against household expenses. See the government website for more details

With income protection cover you can receive tax-free payments of  50-70% of your average income to help you keep on top of your bills.

What does income protection for self-employed people generally cover? 

Your policy could cover your rent, mortgage payments, outstanding debts and even your employees’ salaries. Before you compare policies, you should think carefully about what expenses you’ll need to cover and when it’s time to compare, check the policy details carefully to see what’s included. 

As well as deciding on the level of cover, when comparing quotes for income protection, you can also choose: 

  • if you want short-term cover that protects you for a set amount of time, or long-term cover that covers you until you’re able to work again, or ready to retire
  • the length of deferral period, which is how long you have to wait after you claim before you receive your first payment

How much self-employed income protection cover do I need?

Government research has found that it’s difficult to measure income for self-employed workers. Some self-employed people have regular, consistent work and others work irregularly or on a project basis. But however you work, it’s probably accurate to say your income would be significantly impacted if you were injured or taken seriously ill. 

To work out your average income, most insurance providers will look at your pre-tax profits, usually over the course of the last financial year. If you were to fall ill and make a claim, the monthly pay-out you receive would be an agreed percentage of that calculated average monthly income.

How much does income protection insurance cost? 

The amount you’ll pay for income protection insurance will depend on several factors, including the type of policy you choose and your personal circumstances. Insurance providers will consider: 

  • What you do for a living and the risks involved in your job. For example, if you’re a contractor working on building sites, your insurance provider will likely calculate that you’re a much higher risk than a self-employed graphic designer working from a home office.
  • Your age. The assumption being that the older you are, the more likely you are to fall ill, or suffer an injury.
  • If you have any existing medical conditions that may make you more likely to claim.
  • The level of cover you need, in terms of your average monthly income. Because the more you earn, the more the insurance provider will potentially have to pay out if you do fall ill. 
  • How long you want your policy to last. You’ll pay less for short-term cover.
  • How long your deferral period is. Generally, the longer you can wait, the less you’ll pay in premiums.

What else should I consider when comparing income protection insurance for self-employed people? 

With income protection cover, if you fall ill and become injured and need to make a claim, your insurance provider will assess if you’re able to work. They’ll base their decision on the definition of being ‘fit to work’ detailed in your policy. The terms of your income protection cover, and the procedures used to assess your capacity to work, can vary greatly from one insurance provider to another. That’s why you should check the details of any policy carefully before you buy.

Some policies will only consider your ability to perform the occupation you stated when you bought the policy. Others won’t pay out if you’re able to return to work in a different role, based on your skills, qualifications, and experience. 

It’s also worth bearing in mind that income protection cover is not intended to cover your lost income for reasons other than sickness or injury. You won’t be able to claim for loss of income caused by losing a client or a project, for example. 

You should consider too that that there is no cash-in value for self-employed income protection insurance, so if you don’t use it, you won’t get any pay-out.

What other insurance policies should self-employed people consider? 

Life insurance could be a policy to consider, particularly if you have dependants. There are policies tailored specifically for self-employed people, which could help family members left behind after the policyholder passes away. 

Mortgage protection insurance be an alternative to self-employed income protection – depending on how much you earn and what outgoings you’d need to cover, if you were unable to work for a period of time.

Frequently asked questions

What is a deferral period?

How long you’ll have to wait to get your first payment after making a successful claim. This could be anything from a week to over a year. When deciding on a policy, you should think about how long you can afford to live on the savings you have put aside before money gets tight.

Will an income protection plan for self-employed people cover my full income?

Not usually. Income protection generally covers a percentage of your monthly income – normally around 50-60% but occasionally up to 70% – so you may need to rely on savings as well, if you have them, or tighten your belt until you’re back on your feet.

Will income protection insurance cover lost income due to short-term sickness?

There is normally a minimum length of time that you’ll have to be out of work due to sickness and injury before you can claim. Every policy is different but you’re unlikely to be able to claim for short-term illnesses – for example, COVID-19 – that take you out for less than a month.

Does self-employed income protection include critical illness cover?

Critical illness cover is a separate type of insurance. It’s intended to cover you if you get a serious illness, like cancer, and are unable to work as a result. It usually pays out a lump sum. However, it doesn’t tend to cover more common or everyday illnesses and injuries like a bad back.

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