KEY TAKEAWAYS
- If you’re self-employed, there’s no sick pay to fall back on if you can’t do your job.
- But if illness or injury stops you from working, income protection insurance could provide you with regular payments.
- You could get a portion of your lost earnings until you retire or return to work.
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There’s so much to love about running your own business: from the freedom and flexibility of choosing when and where you work to the simple joy of not having a boss to tell you what to do.
However, for all the many advantages of being self-employed, there are also a few major drawbacks. For some, the greatest source of worry can be the lack of income protection if you’re sick or can no longer work.
While salaried employees can get sick pay to help pay the bills, sole traders, freelancers and side hustlers may miss out on even the most basic safeguards for their income.
However, there’s one thing which might help you sleep a little more soundly at night, and that’s income protection insurance. Read on for the details.
What is income protection insurance?
Income protection insurance can cover a portion of your lost income while you’re unable to work because of illness or injury.
While income protection insurance won’t replace every penny of your income, it could provide regular payments over a long period (or until you’re well enough to work) to replace some of your lost earnings.
Hopefully, you’ll never need to make a claim. But even if you never use it, income protection insurance could provide you with some much-needed peace of mind. Just knowing there’s a safety net for you and your family could save you a lot of worry as you go about your business.
Unlike salaried workers, self-employed people can’t fall back on sick pay (not even statutory sick pay) if they’re unable to do their job. For this reason alone, income protection insurance can be particularly beneficial for sole traders and small business owners.
» MORE: Do I need business insurance?
What does income protection insurance cover?
If sickness or disability gets in the way of you earning money, income protection insurance can provide regular, long-term payments until you get back to work or retire. These payments are typically tax-free.
However, after suffering an injury or falling ill, you’ll have to get through a waiting period – a time in which you can’t claim any payments – before income protection insurance kicks in.
The duration of this waiting period will depend on your insurer and the specifics of your policy. It could range from a few weeks to a year or two after you’re forced to stop working.
Even after the waiting period is over, you shouldn’t expect income protection insurance to fully replace all of your lost earnings. Instead, regular income protection payments are usually worth around half to two-thirds of your pre-tax income.
These payments will continue until the policy ends, or until you die, retire or get back to work – usually whichever is sooner. In the meantime, you may also be able to benefit from access to rehabilitation and support to get you back to earning again.
Income protection insurance vs personal accident insurance
You’d be forgiven for confusing income protection insurance with personal accident insurance.
The two policies are broadly similar, although as the name suggests, personal accident cover only provides financial protection if an accident stops you from working, whereas income protection insurance applies to illnesses as well as injuries.
Another difference is that an employer can take out personal accident cover as a benefit for their employees, whereas income protection insurance is much more tailored to the specific circumstances of the policyholder and therefore isn’t suitable for a group policy.
Personal accident insurance can also provide a one-off, lump-sum payout in the event of accidental death, accidental loss of limbs or sight or if someone becomes permanently disabled after an accident. Income protection insurance, on the other hand, provides regular payouts to cover a portion of your lost income in the long term.
What does income protection insurance not cover?
As with all insurance policies, income protection insurance comes with exceptions and exclusions – and you shouldn’t expect income protection insurance to replace your salary in its entirety.
There may also be some illnesses or health conditions which your insurer won’t cover as part of the policy. This could include pre-existing medical conditions or conditions which are known to be present in your family. Speak to your insurer to get clarity on this point.
» MORE: Types of Business Insurance
How much is income protection insurance?
Again, as with all kinds of business insurance, the cost of income protection insurance will vary based on your circumstances.
For a young and healthy person, income protection insurance could cost as little as £10 per week. Expect prices to start from around £50 per week if you’re no longer such a spring chicken.
Generally speaking, your policy will probably be more expensive if your insurer thinks there’s a greater chance they’ll have to pay out. For example, an older person, who is statistically more likely to fall ill, should expect to pay more for income protection insurance than a younger person in a similar position.
The cost of your insurance premium could depend on the following factors:
- how old you are
- how good your health is (and whether you have any pre-existing health conditions)
- how risky your job is
- whether you’re a smoker or a drinker
- whether you have any dangerous hobbies
- how long you want the waiting period to be (i.e. how much time has to pass before you can make a claim for lost income)
Your insurer may also ask whether you’d be willing to do a different kind of job if you got ill or suffered an injury.
If the answer is yes, you may be able to get a cheaper income protection policy that will only pay out if you can’t do any kind of work at all – rather than a policy that’ll pay out if you’re unable to continue with your current job.
» MORE: Compare Business Insurance
Is it worth getting income protection insurance?
Nobody knows your personal and professional circumstances better than you, and for that reason, only you can decide whether income protection insurance is worth it.
If you have savings, you should work out how long your rainy-day fund would last if you suddenly stopped earning. Would you still be able to cover your bills if you were put out of action for a few months? What about a few years?
If you have so much stashed away that you could still cover essential and unexpected expenses in the future, then you might decide against income protection insurance.
But for most people, their savings wouldn’t last long if they were unable to work. In this case, income protection insurance could provide a vital safety net, as well as peace of mind – especially if other people are depending on you to pay the bills.
If you’re an employee, it’s worth checking to see whether you already have some form of illness or accident insurance through your work.
And while you’re at it, you should also check to see whether you already have the same cover as part of another policy, like those commonly taken out alongside a mortgage. While these policies may not be as comprehensive as income protection insurance, it’s worth checking to see what cover you already have in place before making a decision.
Because income protection insurance can be expensive, you might consider taking out a different kind of policy, like critical illness insurance, instead. However, you should be aware that this cover might not go to the same lengths as income protection insurance, and the range of qualifying illnesses is likely to be far narrower.
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