Self-employed income protection explained

Income protection insurance also offers more than just financial help. If you need to make a claim, many policies provide support and resources to help you get back to work as soon as possible.

To apply for self-employed income protection insurance, you must be self-employed. Either as a Sole Trader, Limited Company director or be in a Partnership.

You can then claim if you are unable to work due to illness or injury for a minimum of four weeks. Waiting for payment depends on your provider and agreed in advance.

You then continue to receive the payments until you return to work or retire.

With income protection, you could receive between 50% and 60% of your average monthly income, and this money is usually tax-free.

What does self-employed income protection cover?

Income protection should cover you for all illnesses that stop you from working. Having self-employed income protection policy means you can focus on getting better.

You can choose how you want to use your payout, depending on your circumstances. The payout can be used to cover:

• Rent
• Bills
• Mortgage payments
• Living costs
• Outstanding debts

Income protection insurance for self-employed people will cover most of your costs. But it is important to know what you can't use it for:

• Business costs: Things like office space, your suppliers’ invoices, or employee salaries.
• Your full salary: The pay outs are lower than your full salary. Although you will not usually pay tax on pay outs, so the impact on your income may not feel so different.
• Large debts: If you opt to receive payments in a lump sum, you often cannot use it to pay off large debts such as mortgages. The pay outs are for regular monthly personal expenses.

You can claim ESA as well as income protection for self-employed people. Your insurer may adjust your payments if you are receiving ESA.

You may also be able to receive Universal Credit (UC) too. But, having insurance could affect the amount of UC you receive. It is always worth speaking to your insurance provider for clarity about ESA and UC when making a claim.

Self-employed income insurance – things to consider

Things to consider when applying for self-employed income protection include:

• Policy cease age: This is when you expect to stop needing the insurance. It will be the age when you plan to retire.
• Deferral period: The period of time from the day you become unable to work until you receive insurance payments. Some people choose to receive payments immediately while others choose to defer payments. This can be the case if, for instance, if they have savings that they would rather use first.
• Pay-out length: Income protection usually covers you until you retire or can return to work. But, some people choose shorter pay-out lengths of a year or two, for a lower premium.
• Sum assured: If your average monthly income is high, it will cost more to assure it than someone earning less. This is because the insurer will need to pay out more if you are unable to work.
• Current age: The older you are, the higher your insurance premiums will be.
• Medical history: Your personal medical history may affect the cost of your premiums.

What is the best income protection for self-employed people?

Choosing the best self-employed income protection will depend on personal circumstances. Here are some factors to consider:

Is another kind of insurance more appropriate? You could look into life insurance for self-employed people or critical illness insurance. These will also cover you for loss of earnings

Do you need it? Some people have extensive savings or family who could support them. Others are young with no major responsibilities. In these cases, you may decide it is not necessary for you.

Could you survive on government benefits? You may own your home outright or have very low outgoings. In this scenario, you may be able to get by on government benefits.

What kind of risks do you face? You know yourself and your business best. Some people may do work or have lifestyles with low occupational risk. For example, a freelance graphic designer who works from home. Whereas other self-employed people work in higher risk environments such as self-employed roofers. Anyone can get sick or injured, but you may choose a different level premium depending on the risks you face.

How long will my self-employed income protection insurance policy pay out for?

Most policies with income protection will pay out until you return to work or retire. But short-term income protection policy, will only pay out for a certain amount of time (such as one or two years).

What is the difference between self-employed income protection insurance and self-employed sickness insurance?

This depends on the policy. In many ways, they are very similar. Both types of insurance cover you if you are unable to work due to sickness, injury, or disability. But, self-employed income protection insurance covers more reasons for being out of work. You should of course read your policy documents for more detail.

Last updated: 13 December 2024

* Payouts can be boosted by up to 20% for the first 6 months of your claim when you reach Silver Vitality status or above. The booster amount is based on your Vitality status at point of claim.