Protection planning for the self-employed

This article is part of
Guide to advising the self-employed

Protection planning for the self-employed

Self-employed people are as vulnerable - maybe even more so - from a downturn in their regular income stream.

As a result, their financial resilience is likely to be low - which means if they were to suffer an illness or have an accident that renders them unable to continue working, their savings will soon dry up.

In May, Scottish Widows research showed 21 per cent of Britons admitting they could not survive financially if they lost their income due to a long-term illness. 

A further study, carried out by Royal London, came up with these figures: 

  • If illness struck, nearly half (43 per cent) felt they could manage for a year if they were unable to work due to serious illness or injury.
  • Some 55 per cent said they would manage for six months.
  • Some 71 per cent said they would manage for three months.

However, the reality was, given their actual levels of savings, only two people in five could survive financially for more than six months if they were unable to work.

This shows how poor is the average person's financial resilience. The message hits home further when it comes to the likelihood of a worker being off sick through long-term illness or accident. 

The figure, below, taken from Royal London's State of the Protection Report, using figures from Pacific Re, highlights the reality of how precarious people's financial situation is - especially when it comes to someone who is the main or the only employee in their own business.

Source: Royal London/Pacific Re

Income protection 

Adam Higgs, head of research, adviser services, for F&TRC, says it is important to protect the income first and foremost.

He explains: "As with all clients, protecting income should be the first objective. Unlike many employed people, the self-employed do not benefit from a company sick pay scheme.

"As such, they are reliant on savings and the state from day one if they are unable to work due to ill health or injury.

"Income protection (IP) policies have vastly improved for self-employed people offering shorter deferred periods, more benefits to help people get back to work and even policies with benefit amounts based on essential expenditure rather than income."

For Mr Higgs, the key to recommending income protection for the self-employed is getting the benefit amount right, and getting the timing right as to when this kicks in. 

He adds: "This means that an accurate understanding of the client’s expenditure and the savings they have in place are critical."

Ian Smart, product architect at Royal London says: Our research shows that small business owners recognise the importance of insuring the equipment that helps them earn an income but they often overlook the importance of insuring themselves. 

"It can sometimes be difficult for the self-employed to prove their earnings to apply for a loan, mortgage or insurance. 

"We recognised this was a barrier to sales so recently made some changes specifically for the self-employed. We now allow them to cover a proportion of the fixed overheads they have for the day to day operation of their business, as well as replacing the income they take from the profit generated by the business."