Income Protection for the Self-Employed: A UK Guide

The gap

An employee who falls ill usually has some cushion: employer sick pay, or at least Statutory Sick Pay (SSP). GOV.UK says that to get SSP you must be classed as an employee, so sole traders and partners don't get it. MoneyHelper points out that without an employer you get no sick pay, although you might qualify for some state benefits.

For a self-employed person, that can mean income stops as soon as you can't work, while the mortgage, rent and bills carry on. Employee vs contractor safety net compares the two positions side by side.

How income protection works

Income protection pays a regular amount, usually monthly, if illness or injury stops you working. MoneyHelper describes two broad types:

• Long-term income protection, which usually pays until you can return to work, retire or the policy ends.
• Short-term cover, sometimes sold as accident, sickness and unemployment cover, which usually pays for one or two years and is often designed around debts such as a mortgage.

Choosing a waiting period

The waiting period, also called the deferred period, is how long you must be off work before payments start. Common options run from a few weeks to a year. Without sick pay, many self-employed people look at shorter periods, and a longer period lowers the cost if you have savings to bridge the gap. Income protection deferred periods explains the trade-off.

How your income is assessed

Insurers usually cover a proportion of your earnings and check them against your tax returns or accounts, often an average of recent years. If profits vary a lot, the amount you can insure, and what you could claim, may be based on that average rather than your best year. Keep returns up to date and check how the insurer will assess income at claim time.

If you run a limited company, the position is different again. See income protection for limited company directors.

Other cover the self-employed often look at

MoneyHelper also mentions:

• Critical illness cover, which usually pays a tax-free lump sum on diagnosis of a listed serious illness, but not for common reasons for time off such as back problems or stress;
• Life insurance, for anyone who depends on your income;
• Private medical insurance, which can shorten waits for treatment and so time off work.

Questions worth asking

• How long could you manage on savings if you couldn't work?
• What monthly amount would cover your essential costs?
• How will the insurer assess your income if your profits vary?
• Does the policy pay if you can't do your own job, or only if you can't do any job?
• Are there exclusions for existing conditions or particular activities?