If you work for yourself, have you ever wondered how you’d pay the bills if illness or injury stopped you from working? Without sick pay or employer benefits, your income could vanish overnight, if you suddenly got ill or injured. That’s where income protection insurance comes in. But how does it work for self-employed people, and is it worthwhile?
This guide explains how income protection works if you’re self-employed, how it differs from other types of cover, and what to look for in a policy.
What is income protection insurance?
Income protection is an insurance policy that pays you a monthly income if you can’t work due to illness or injury. It’s designed to replace part of your earnings until you recover, retire, or the policy ends.
If you’re self-employed and your income stops, income protection gives you the financial breathing room to:
- Pay your mortgage, rent, and bills
- Cover everyday living expenses
- Focus on recovery, not cash flow
How does it work for self-employed people?
Here’s a step-by-step look at how income protection works if you’re self-employed:
1. You choose your cover amount
You can typically insure between 50 and 70 per cent of your pre-tax profits. This is based on your average earnings over the past 1 to 3 years. You may need to provide tax returns or accounts.
2. You choose a waiting period (deferred period)
This is the amount of time you must wait before the insurer begins paying. Standard options include 1, 4, 8, 13, or 26 weeks. The longer the waiting period, the lower your premium will be.
3. You get ill or injured and can’t work
If you meet the policy’s definition of incapacity (usually meaning you can’t do your job), you submit a claim.
4. You receive monthly payments
Once your waiting period ends, the insurer pays a monthly income until you recover, reach retirement, or hit the maximum benefit period (e.g. 1 year, 2 years, or full term).
What type of income protection is best for self-employed people?
When you’re self-employed, flexibility and comprehensive cover are key. Look for:
1. Own occupation cover
This means the insurer pays if you are unable to perform your specific job (not just any job). For example, a self-employed plumber wouldn’t be expected to take up an office role.
2. Guaranteed premiums
These stay the same for the length of the policy. They make it easier to budget compared to reviewable premiums, which can increase over time.
3. Long-term vs. short-term cover
- Long-term income protection pays until you retire or return to work.
- Short-term policies typically cover 1 or 2 years per claim. They’re cheaper but offer less protection.
4. Inflation protection
Select a policy that increases in line with inflation, ensuring your income keeps pace with rising living costs.
Is it harder to get income protection if you’re self-employed?
Not necessarily, but you’ll need to show evidence of income, such as:
- Your last 1-3 years of Self Assessment tax returns
- SA302 forms from HMRC
- Certified business accounts
If your income fluctuates, insurers may calculate your benefit amount by averaging it over several years.
FAQs
Does income protection cover self-employed people?
Yes. Many income protection providers offer policies specifically for self-employed workers, freelancers, and contractors.
How much does it cost?
Premiums vary depending on your age, job, health, cover amount, and waiting period.
Are income protection payouts taxable?
No, if you pay the premiums personally. If your business pays the premiums, the tax treatment may vary.
What’s the difference between income protection and critical illness cover?
Income protection pays a monthly income for as long as you’re unable to work. Critical illness pays a one-off lump sum if you’re diagnosed with a specific illness like cancer or heart
disease.
Final thought
Income protection is one of the most important types of cover for self-employed individuals. With no employer to rely on, this insurance gives you a personal safety net if your health takes a hit.
It’s not just about protecting your income. It’s about protecting your lifestyle, your family, and your ability to run your business without fear of the unknown.
Need help finding the right cover for your trade, income, and budget? Our advisers can help compare policies tailored for self-employed professionals.
