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Income Protection for Self-Employed People: What Happens if You Can't Work?
Being self-employed comes with plenty of advantages.
You might have more flexibility, greater control over your working day and the opportunity to build something for yourself.
But there's also a responsibility that can be easy to overlook.
What happens to your income if you become too ill or injured to work?
When you're employed, you may receive sick pay through your employer.
When you're self-employed, the situation is usually different.
If you aren't working, you may not be earning.
And unfortunately, your mortgage, household bills and everyday expenses don't stop simply because you're unwell.
That's why income protection insurance can be worth considering.
What Is Income Protection Insurance?
Income protection is a type of insurance designed to provide regular payments if you're unable to work because of illness or injury.
Rather than paying a single lump sum, a suitable policy can replace a proportion of your earnings while you meet its conditions for claiming.
Depending on the policy, payments may continue until you're able to return to work, reach the maximum benefit period or reach the policy's end date.
The amount you can insure depends on your earnings, circumstances and the insurer's rules.
Many personal income protection policies offer cover based on a percentage of your eligible income, commonly around 50% to 65%, although the exact amount varies.
Why Is Income Protection Particularly Relevant if You're Self-Employed?
Imagine you're a self-employed electrician.
Business is going well, you've built a good client base and you're earning enough to comfortably cover your living expenses.
Then you suffer an injury that prevents you from carrying out your usual work for several months.
You might be able to rearrange some appointments.
Perhaps another contractor could take on a few jobs.
But if the business depends heavily on your ability to work, your earnings could fall significantly.
Meanwhile, you still have your mortgage to pay.
Your household bills continue.
You may have business expenses to consider as well.
Without adequate savings or another source of income, a prolonged absence from work could become financially challenging.
Income protection is designed to help reduce the financial impact of this type of situation.
How Would You Pay Your Mortgage if You Couldn't Work?
It's worth doing a simple calculation.
Imagine your essential household expenditure is £2,400 per month.
That includes your mortgage, utilities, food, transport and other necessary expenses.
You have £7,200 in accessible savings.
If your income stopped completely and you had no other money coming in, those savings would cover approximately three months of essential expenditure.
But what happens in month four?
And what happens if you're unable to return to work for a year?
This is the type of risk worth considering when reviewing your finances.
Income protection isn't suitable for everyone. However, understanding how long your savings would last can help you decide whether it deserves a closer look.
How Does Income Protection Work?
Income protection policies have several features that determine when and how benefits are paid.
The Monthly Benefit
You select an amount of cover based on your eligible income and the insurer's maximum limits.
If you become unable to work for an insured reason and satisfy the policy's claim criteria, it can pay an agreed monthly benefit.
The amount actually payable may be affected by your earnings, other benefits and the insurer's policy conditions.
The Deferred Period
The deferred period is the time between becoming unable to work and the point at which insurance payments can begin.
Common options include four, 13 and 26 weeks, although other periods are available.
For example, if you choose a 13-week deferred period, you would generally need to meet the policy's incapacity criteria throughout that waiting period before benefits become payable.
A longer deferred period will often mean a lower insurance premium.
However, you would need sufficient resources to manage your expenses while waiting for payments to begin.
The Benefit Period
Different policies offer different maximum payout periods.
Some provide a benefit for a limited period per claim, such as one or two years.
Others can potentially pay for much longer, sometimes until a specified retirement age.
Longer benefit periods may offer more comprehensive protection, but they can also affect the cost.
What Does Income Protection Cover?
Depending on the insurer and the policy, income protection may cover a range of illnesses and injuries that prevent you from working.
This can include certain physical health conditions and mental health conditions, subject to exclusions and the relevant incapacity definition.
The important point is that policies don't all work in exactly the same way.
It's essential to understand what the insurer considers an inability to work.
What Does 'Own Occupation' Mean?
One particularly important feature is the definition of incapacity.
An own-occupation policy generally assesses whether your illness or injury prevents you from performing your own occupation.
Other policies may use different definitions, such as whether you could perform another suitable occupation.
This distinction can make a considerable difference to how claims are assessed.
For self-employed people with specialist or physically demanding occupations, the definition deserves particular attention.
Can Sole Traders Get Income Protection?
Yes, subject to eligibility and underwriting.
Income protection isn't limited to employees.
Many insurers consider applications from sole traders and other self-employed individuals.
However, you'll normally need to provide information about your occupation, earnings and financial circumstances.
Different insurers may assess self-employed income differently.
Some might request tax calculations, accounts or other evidence of earnings.
It's also worth understanding that turnover and personal income aren't the same thing.
If your business invoices £100,000 annually, that doesn't automatically mean you're eligible to insure £100,000 of personal income.
The insurer will assess the income that qualifies under its rules.
What About Limited Company Directors?
Limited company directors can also explore income protection.
However, arrangements can be more complicated when income is received through a combination of salary and dividends.
Insurers may have different approaches to assessing those earnings.
There may also be differences between arranging a personal policy and certain company-funded protection arrangements.
The appropriate option depends on your circumstances, and company-funded arrangements can have tax implications requiring specialist advice.
Does Income Protection Cover Business Expenses?
Personal income protection is principally intended to replace part of your personal earnings.
It shouldn't automatically be assumed to cover ongoing business costs such as premises rent, staff salaries or commercial loan repayments.
Separate business protection products may be available for certain business expenses.
It's worth distinguishing your personal financial needs from the costs of keeping your business operating.
Income Protection vs Critical Illness Cover
These two types of protection are often confused.
Income protection is generally designed to pay a regular benefit if illness or injury prevents you from working, subject to the policy's conditions.
Critical illness cover normally pays a lump sum if you are diagnosed with one of the specified conditions covered by the policy and meet the relevant definition.
For example, somebody may be unable to work for an extended period because of a condition that doesn't qualify for a critical illness payout.
Depending on the policy, they may still qualify for income protection.
The two products protect against different financial risks.
You can read more about the available options on my Protection Advice page.
How Much Does Income Protection Cost for Self-Employed People?
There isn't a single price that applies to everyone.
The premium can depend on several factors, including:
Your age and medical history.
Your occupation and the work you perform.
Whether you smoke.
The monthly benefit you want to insure.
Your chosen deferred period.
The maximum benefit period.
The policy's definition of incapacity and other features.
For example, somebody working in a physically demanding trade may be assessed differently from somebody working primarily at a desk.
It's important to compare not only the cost but also the extent and suitability of the protection.
Is Income Protection Worth It if You Have Savings?
That depends on your circumstances.
If you have substantial accessible savings, another reliable household income or other arrangements that could support you through a long absence from work, income protection may be less of a priority.
However, it's worth considering how long you would realistically be comfortable relying on those resources.
Would using your savings mean postponing important plans?
Could your partner comfortably cover all the household expenses?
What would happen if your absence from work lasted considerably longer than expected?
There isn't one answer that applies to every self-employed person.
What if You've Only Recently Become Self-Employed?
Some insurers may be able to consider applications from people who have recently started trading.
However, establishing eligible earnings can be more complicated if you don't yet have an extensive trading history.
Availability and the evidence required vary between providers.
If you've recently started working for yourself, it's worth discussing your circumstances rather than assuming protection won't be available.
If you're also considering buying a property, you can read my guide to Self-Employed Mortgages.
Frequently Asked Questions
Is Income Protection Compulsory if You're Self-Employed?
No. Income protection isn't compulsory, but it may be worth considering if you rely on your earnings to meet financial commitments.
Can Income Protection Cover Mental Health Conditions?
Some policies can provide cover for mental health conditions where the relevant criteria are met. Definitions and exclusions vary between insurers.
Does Income Protection Cover Redundancy?
Standard long-term income protection generally covers incapacity due to illness or injury rather than redundancy.
Can You Claim More Than Once?
Many long-term income protection policies allow multiple claims during the policy term, provided you meet the relevant conditions.
Can You Change Your Cover Later?
Possibly. Some insurers allow certain changes, but increasing or amending cover may require additional underwriting.
Protecting Your Income When You're Self-Employed
Working for yourself can be incredibly rewarding.
But it also means taking greater responsibility for your financial security.
If your household relies on your earnings, it's worth understanding how you would manage if illness or injury prevented you from working for an extended period.
I help self-employed people across Manchester, Cheshire and throughout the UK understand their mortgage and protection options.
Whether you're a sole trader, contractor or limited company director, I can help you explore the protection available and consider what may be appropriate for your circumstances.
You don't need to have a mortgage application underway to discuss your protection needs.
Income protection eligibility, premiums, benefits, exclusions and claim conditions vary between insurers. This article is general information and is not a personal recommendation.
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