Protection for the self employed

Without a range of employee benefits to fall back on, protection is an important consideration for the self employed.

“Protection is incredibly important to the self-employed,” says Linton Penman, head of retail sales and marketing at UNUM. “As well as enabling them to replace their income if they cannot work, it can also preserve the viability of their business while they are ill. Small businesses can quickly go under if they fail to meet their contractual requirements.”

State support is available if a self employed person is unable to work due to sickness or injury. Rather than Statutory Sick Pay, which is only available to the employed, self employed people can claim Employment and Support Allowance. Eligibility is subject to a medical assessment and the maximum amount that is paid is £67.50 a week for the over 25s during the 13 week assessment phase, followed by £99.85 a week.

For anyone wanting a larger safety net, private provision is a must. Income protection is the number one consideration for the self-employed, giving them a replacement income if they are unable to work as a result of sickness or injury. But, while there is little doubt about its value to this group of people, there are a number of areas where a self employed person’s requirements will need close attention.

Calculating income

Financial underwriting is the main area that requires careful scrutiny. Unlike employed people, where income levels are relatively stable, self employed people often have variable income. This can cause issues, both at the application stage and at the point of claim.

Broadly, two different ways of assessing income are used. Some insurers base benefit on the average of the last three years’ income; others are happy to take just the last year into account. As these two calculations can give markedly different results, especially if income fluctuates greatly or has been growing rapidly, it is important to check which method the insurer uses.

Another important point to consider is the definition of income being used. This can be particularly important where a self employed person has set up a limited company. This is common among IT contractors who pay themselves a small salary to keep their tax bill low and then supplement their income with chunky dividends.

Peter Chadborn, director of Plan Money, says that most insurers are happy to take these dividends into account while others will judge it on a case by case basis. “If the dividends are dependent on the policyholder continuing to work then it is usually accepted as part of their income. If they could continue to be paid in the event of a claim, they probably would not be taken into account,” he explains.