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.
When making a claim, you must first decide how much of your income you want to cover. For example; 50% of annual earnings that total £75,000 (or £6,250 a month). If you then make a claim, after the chosen period of time you have to pay but cannot claim, and your annual earnings were the same or increased from when you took out the policy, you will be pay that amount out; in this case £6,250 per month. If the annual earnings of the year before making a claim were less than they were when you took out the policy, the monthly benefit amount will be recalculated based on that lower amount. After the deferred period has passed; this is the amount of time you have to be unable to work before the policy will pay out (decided when taking out the policy and usually 6 months), you will receive the monthly benefit of £6,250 in this case on the 7th month. This will continue to be paid out until you can return to work, or up until a set age that is decided by the insurer when taking out the policy. It is important to note that some insurers will look at the previous 12 months income to work out the monthly benefit amount, however some will look at the last 3 years and take an average based around that. This can influence which insurer and policy would be the most appropriate to take out. You will be asked to provide evidence of your tax returns, and bank statements are often enough to prove your earnings as well.
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.
