Self employed income protection is the set-up in the same manner as any other income protection policy, the main difference is how the level of cover is calculated. If you are self employed then it is likely that you are unable to benefit from certain income safety nets enjoyed by the employed, such as sick pay entitlement. As a result, income protection is a great way to reduce your financial exposure to sickness and injury.
What does self employed income protection cover?
A income protection plan allows you to insure up to 60% of your pre-tax earnings. This equates to your share of pre-tax profit from your trade, profession or vocation after deduction of trading expenses. For example, supposing that your share of this figure was £100,000, then the maximum that you would be able to insure is £60,000 per annum or £5,000 per month. The reason for this is that it roughly equates to your usual post-tax earnings, thus maintaining your living standards.
If you were deemed unfit to work due to sickness or injury during the cover period the policy would pay you a tax free monthly benefit until either you return to work or the policy term ends. It is common for income protection cover to last until retirement age and you are entitled to claim on the same policy multiple times.
Please be aware when applying for an income protection policy you will have to choose the incapacity definition for the plan of which there are three:
- Own occupation
- Suited occupation
- Any occupation
Is it important to recognise the difference between any, suited and own occupation definitions thus understanding when you are eligible to make a claim under each of the definitions. Own occupation will payout if you are unable to work in your own occupation conducting your normal role due to sickness or injury where an any occupation definition may only pay out if you are unable to earn an income in any role.
Please note that income protection insurance is a policy designed to protect you from long term sickness or injury. If you are looking to protect a loan or mortgage from short term accident, sickness or unemployment you should consider accident, sickness and unemployment cover or mortgage protection insurance.
Self employed income protection benefit calculation
The majority of insurers recognise that it is normal for the self-employed to have income fluctuations from year-to-year. As a result, most insurers have designed income protection policies for the self-employed where it is possible to calculate the benefit payable based on average pre-tax earnings over the previous three years.
In other words, if you need to make a claim they will ask you for evidence of your personal earnings during the 36 months prior to incapacity and calculate an annual average from these figures. It will be from that annual average that you will be entitled to receive up to 60% of pre-tax earnings as income benefit (or whatever percentage of earnings you chose at the start of the self-employed income protection policy).
It is important to check the policy wording or when purchasing your self employed income protection plan as not all insurers allow you to calculate your benefit from earnings over the past 3 years. Some insurers allow you to choose whether you wish the benefit to be calculated from earnings over the previous 12 months or 36 months, whereas others will only allow the calculation to be based on the previous 12 months.
As insurance brokers dealing in insurance day in, day out, we are in a great position to help you find the plan that best suits your needs and make sure you get the most competitive rates.
What earnings evidence will I need to claim on my self employed plan?
To make a claim on your self employed income protection policy you will need to provide evidence of personal earnings during the 12 or 36 months prior to incapacity, as assessed for income tax purposes and declared to and agreed by HM Revenue & Customs, together with the profit and loss accounts which relate to this.
If you need any guidance with your self-employed income protection plan or simply want an income protection insurance quote please do not hesitate get in touch. For more information on income insurance visit our sister site with a dedicated self employed income protection section.
Impartial insurance information for consumers can be found at the British Insurance Brokers Association website and the regulation of the market can be found on the Financial Services Authority’s website. If self employment is not enough for you and you are looking to grow your business you may want to consider a group income protection scheme to reduce the risk of long term employee sickness.
