Self-employed income protection insurance is an insurance policy that pays out a tax-free proportion of your pay if you have an injury or become ill to the point where you cannot return to work. Due to the nature of self-employment, you don’t get statutory sick pay or redundancy pay, so an income protection insurance plan could pay out in the event of illness or injury. These policies usually pay out a set monthly amount for an agreed period of time (commonly 12 or 24 months), or until you are able to return to work.
When choosing an income protection plan, you need to decide how much income you want to be covered. This can be a percentage of your annual income or a fixed amount. The monthly or annual pay-out can be capped by some insurers so check their policies thoroughly to make sure it will be able to provide the right amount of cover for you. You also need to consider how long you want the cover period to last for. Most insurers will provide cover until a set age, but this age can differ between insurers. Often you will be required to provide at least 1 years audited accounts to serve as proof of your income.
If you are self-employed and are thinking about setting us a sole trader, it is recommended to take out a personal income protection plan to cover up to 65% of your gross earnings. For this, the premiums will want to come from a personal bank account, and the monthly benefits will be paid back into this same account tax-free. The level of cover for this type of plan needs to be the personal earnings instead of the total revenue for each year. This would be worked out as the total revenue and then take away the business costs (materials and supplies) to leave you with the gross income. This is how much you would pay tax on and also the amount you can base the cover protection amount upon (for example 65%).
If you are making the decision to become self-employed, it is very important to have a good personal income protection insurance plan which will help support you and your family in case of illness or injury. If you take out a policy before going self-employed, then the policy will be taken out based on your current employment situation. If you chose the ‘any occupation’ the monthly benefit would only pay out if you weren’t able to do any job due to illness or injury. Choosing the ‘own occupation’ means if you are unable to continue your current job due to illness or injury, you would then get the monthly benefit.
If you are considering taking out a personal income protection plan, our highly qualified advisers at Income Protection Expert are here to help by answering any questions you might have and by working with the top insurers to find you the best policy for you.
