What is Self-Employed Income Protection Insurance? Our Complete Guide

It takes a special kind of person to become self-employed. You had a dream, and you followed it! Although you reap the benefits of running your own business, such as having full control of the company’s decision-making, flexibility in work hours, and certain tax advantages, you also face a sea of uncertainty. If something happens to you and you are unable to work, you are not furnished with the same financial support as an employee.

An income protection policy for the self-employed is one way to deal with some of the financial uncertainties that your position brings. If you’d like to find out exactly what this insurance cover is, the benefits of holding it, and how you’re allowed to use your payments should you make a claim, read our complete guide to self-employed income protection insurance.


What is Self-Employed Income Protection? 

One of the biggest fears experienced by self-employed business owners is the thought of being unable to work due to an illness or injury. As an employer, you understand that your employees are entitled to statutory sick pay – but as the business owner, that isn’t a perk you’ll benefit from. 

A self-employed income protection policy is a type of insurance that will make regular payments, representing a proportion of your average income (usually between 50 and 70%), should you find yourself unable to work. These payments help you stay afloat financially, allowing you to keep up with personal bill payments and the cost of living. The reassurance that a stream of income is always possible, even if you’re off your feet, will mean that should the worst happen, you’ll recover without the fear of falling into personal debt.

If you’re registered as self-employed, whether as a sole trader, a limited company director, or a partnership, you may be eligible to take out this form of salary protection insurance.


Self employed income protection insurance - Shows a jar of coins


Generally, your policy will stipulate that you must be medically unfit to work for at least four weeks before this cover can kick in and start making payments. You will need to consider the deferral period – that is, the time between you making a successful claim and your payments starting. You can discuss this period with your insurer, which is usually based upon your expectations of how long you could financially support yourself before needing additional money. If you have savings, you may have a longer deferral period or opt for just a four-week period, ensuring you get support as soon as possible.

Your insurer will also advise you on how these payments will work. Some policies are designed to keep up monthly payments until you can return to work or until you retire. In contrast, others will have a designated payment timeframe, for example, six months, 12 months, or until the current policy expires. Even if you cannot return to work after the agreed period on your policy, you won’t receive further payments.

Some insurers will allow you to receive these payments as one lump sum – but you should be aware that your policy will stipulate just how you can use this money. 


Keeping Self-Employed Business Owners Safe 

If one thing is certain in life – nothing is certain. Even if you take great care of your health and consider yourself a careful and cautious person, poor health can strike, and unexpected accidents can happen.

From a cardiovascular event to an infection leading to hospitalisation and lengthy recovery, you never know what health condition lurks around the corner. Following the pandemic, some business owners have been left incapacitated and unable to work thanks to long Covid. At the same time, recovery from surgery can often take several months if complications arise. Accidents at work or a bad road traffic collision can leave you unable to work for months – and in each case, no matter how much you may need to get back to your role in the business, there are some health issues you cannot push through to make it to the office.

As a business owner, it’s important to consider how you’d survive if you were unable to work for a few months – or even longer. Do you have savings to support yourself, and how long would these last? How long could you keep up with your household bills and debts? 

As a business owner, you don’t get sick pay if you’re unable to work. Though you may be able to claim an Employment and Support Allowance if a long-term health issue prevents you from working, this may not represent enough income to keep your finances stable. Self-employed income protection insurance becomes a way of keeping yourself safe should your savings or the government allowance fail to offer you enough support.


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Benefits of Self-Employed Income Protection   

The benefits of a self-employed income protection policy are both psychological and practical. The worry of supporting yourself or your family and retaining your business if you cannot work can lie very heavily on a business owner’s shoulders. Stress is known to negatively impact our performance at work. As the person in charge, worrying about the unknown may influence important business decisions moving forward, curbing your ambitions and making you overly cautious. If you know you’ll have financial security, even if the worst happens, you can focus on making your business the success it deserves. You can make big plans, safe in the knowledge that you’ve protected your financial position. 

With your head for business, it makes good practical sense to protect your finances. If those are stable, you won’t have to worry about selling your business or its assets to keep you personally afloat. 


What Will be Covered?  

Although you’re a business owner, self-employed income protection insurance is about your personal finances, not your business. This principle is best demonstrated by what the insurance payments can be used to cover and what they can’t be used to cover.

Your monthly income protection payments can be used for: 

  • Mortgage or rent payments on your home
  • Groceries
  • Utility bills
  • Fuel for your personal vehicle
  • Outstanding debts


However, these payments cannot usually be used for: 

  • Mortgage or rent on business premises
  • Invoices relating to your business
  • Employee salaries
  • Large debts – for example, you couldn’t use these payments to pay off a mortgage in a lump sum

If you’re in a position where you’ll sadly have to close your business, income protection insurance redundancy cover is not possible since this form of insurance pertains only to your time in employment.


Self employed income protection - Shows a business owners' desk


Finding the Right Policy for You   

No two business owners are the same, so the best way to find the right policy is by discussing your needs with an insurer. There are a few key points to consider, starting with just how long your savings or other financial support could cover all your necessities if you cannot work. You may already be quite close to retirement and have a solid safety net of savings – in which case, this type of insurance may be an unnecessary expense. 

Remember, don’t worry if your backup funds will run dry quickly because it’s usually possible to have a deferral period of just one month. So, make sure you choose a deferral period that will leave you with money or receiving money before you actually need it. 

Your insurer will often look at your pre-tax profits to calculate how much cover you’ll need or receive. This approach takes into account that many self-employed businesspeople have an income that can fluctuate greatly from month to month. By looking at the profits across the span of a year, an average income can be calculated.

Your insurer will probably ask if you want short-term or long-term cover. Short-term cover will keep payments arriving for a set amount of time, and this will be the least expensive option for paying for your premium. Long-term cover will mean the payments will keep coming either until you can work again or until you reach retirement age.

It’s also worth asking whether there is a more appropriate type of insurance to meet your needs. For example, critical illness insurance and life insurance for self-employed people can be tailored to cover loss of earnings. If your biggest worry is paying the mortgage, you may be better off taking out mortgage protection insurance as this better meets your unique financial needs. 

Your budget will also be a big deciding factor in choosing a suitable policy, and you can read more about the cost of income protection insurance next. 


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How Much Does Self-Employed Income Protection Insurance Cost?

There are quite a few factors that will be taken into consideration when calculating your premium, including: 

  • The nature of your business – if you work in a business deemed higher risk, there’s a greater chance of your receiving an injury and needing to fall back on self-employed income protection cover. If you run a building business, you’ll be deemed a higher risk than someone who runs a web designing business, for example.
  • Existing medical conditions – you must be honest about any existing health complaints, as failure to disclose could void your policy. Having certain health issues will class you as a higher risk, and in that case, your premium may be a little higher.
  • Your age – since accidents are statistically more likely to occur the older you are, your premium may increase with age.
  • Your average income – the higher this figure, the higher your premium.
  • Policy length – if you seek long-term rather than short-term cover, you’ll pay more for your premium.
  • Deferral period length – opting for a longer deferral period will lower the cost of your income protection insurance.


All Your Unanswered Questions 

With this type of insurance serving such an important purpose for the self-employed businessperson, it’s understandable that you’d have many questions about the finer details. We’ve got you covered with the following useful information. 


Who Will Decide Whether I’m Unable to Work? 

This is an extremely relevant point that you must discuss carefully with your insurer when the policy is being written. When you make a claim, the insurer will investigate your ability to work, and their decision will be based upon the definition of “fit work” detailed in this policy. 

Often, an “own occupation” policy is written, in which they’ll assess your ability to work in the role you had been performing in your business when making a claim. You should be aware that some policies will stipulate that, based on your skills and experience, payments may end or not even be made if you can or become fit enough to return to a different work role within the business. 


Will This Insurance Pay-Out for a Short-Term Illness? 

Even if you’ve had a nasty case of the flu that prevented you from working for a couple of weeks or a back injury that left you debilitated for nearly a month, it’s very unlikely that you’ll be able to claim for illness or injury that lasts less than a month. 


Can this Insurance be Claimed as a Business Expense? 

This type of insurance cannot be claimed as a business expense as it is taken out on behalf of you – the owner. You’ll pay tax on it, but these will be tax-free if you make a claim and receive payments. Had you claimed it as a business expense, you’d be expected to pay tax on these payments. 


Is there a Cash-In Value to this Type of Policy? 

No, there is no cash-in value. If you don’t make a claim and your policy runs out, you won’t get anything back that you paid in. 


Self employed income protection insurance - Shows a stack of coins


Insurance for the Self-Employed Business Owner

While income protection insurance helps you, as a business owner, protect the salary that keeps all your personal expenses covered, there are other types of insurance you might like to take out to protect your business.

Here’s the rundown on the key types of cover you might need:

  • Public liability – which protects you should a member of the public claim that they have become injured or their personal property damaged because of your business.
  • Employer’s liability – to protect you should an employee claim that their employment caused an illness or injury.
  • Professional liability – to deal with financial losses associated with a client’s unhappiness with your work.
  • Building and contents – to help safeguard your business premises and all the equipment and furnishings.
  • Credit insurance – which protects you should a client fail to pay an invoice.
  • Keyman insurance – some businesses would be profoundly affected by the loss of certain staff members. This cover will help to soften the blow of such a loss.
  • Relevant life insurance – where the business pays out for the policy. This may be the more tax-savvy route for a business owner to take.


If you think income protection insurance is just what you need, why not give Park Insurance a call today or fill in our form? We’re passionate about working with the UK’s business owners, and we’ll always take the time to talk you through each aspect of your policy.