The self-employed are particularly vulnerable to a loss of income if they are taken ill. There is no safety net of a large employer providing generous sickness benefits, and a long term illness or disability can have a devastating financial effect on the self-employed person and their family.
However cover can be arranged to provide a replacement income with a Self Employed Income Protection plan. This type of insurance pays a regular monthly benefit if the insured person cannot work through illness or disability, and can pay benefits right through to retirement. The maximum benefit payable is a proportion of the pre-illness profits made by the business, usually 50% – 60% – there has to be some incentive for the insured to return to work.
Sometimes calculating the profits can be tricky. Self-employed incomes can fluctuate, sometimes wildly, so often an average of the last three years is used rather than just the most recent trading year. An additional problem is proving recent income, as the self employed do not have to submit tax returns until at the latest the January following the end of the previous tax year. It is therefore important to understand how any particular insurer treats the income position.
The monthly cost of self-employed income protection depends on a number of things:
- The age when the plan is taken out. Older people tend to have more illnesses and so pay more.
- The health and medical history of the applicant. If you have existing health problems you may pay more.
- The actual occupation. Some jobs are regarded by insurers as more ‘risky’ and so likely to contribute to illness, such as those that are very physical and those that involve working at heights. Self-employed tradesmen are perhaps more likely to have ‘risky’ jobs than self-employed Consultants. Insurance companies have endless statistics regarding how many claims have been made for different occupations, and charge accordingly.
- Lifestyle and hobbies. Smokers pay more, as do those with riskier hobbies such as motor bike racing, private flying, mountaineering etc.
- Waiting (or ‘deferred’) period. The longer you can go without benefits, the lower the premiums. This can be a real problem for the self–employed, unless they have significant levels of savings to fall back on. Deferred periods range from 4 weeks up to 12 months.
An important consideration is the definition of incapacity which allows a claim to be paid. The narrowest and best definition is ‘own occupation’ – i.e. you are too poorly to do your own job. ‘Any occupation’ would mean you were too poorly to do any job at all – much wider. A ‘suited occupation’ means you cannot do your job nor one that you are suited to by way of training, education and skills.
If none of the above can apply, insurers will determine your incapacity by an independent test of your ability to perform defined ‘activities of daily living’ – being able to bathe, dress and undress, walk unaided, climb stairs, cook etc.
Self employed income protection plans need to be reviewed regularly, and at least annually, in case changes to the income have taken place. If income has gone down you do not want to be paying for too much cover that you cannot fully claim. Some self employed workers can also have rapidly increasing income and so cover needs to keep pace with this.