Income Protection  

Securing protection for self-employed clients

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

Proving income

According to Mr Varsani, when it comes to securing IP for the self-employed, the main difference tends to be around the earnings assessment at the time of the claim.

Mr Varsani explains: “For an employed client, the provider may ask for proof of the last 12 months' earnings to assess the claim amount against earnings.

“For a self-employed client, providers may ask for two years of self-assessment figures and work on the average.”

He continues: “[But] earnings for a self-employed client can vary from one year to the next due to a multitude of reasons.

“Many providers say they would 'look at this situation on a case by case' basis, there is no set protocol.”

He adds: “Of course, some providers do offer the minimum monthly benefit payment. However, this could be too restrictive for those earning in excess of these limits.”

It is, however, important to remember that IP policies generally come with a minimum of working hours per week clause.

Similarly, Mr Hanley suggests that when it comes to IP, the only difficulty may be proving income.

He says: “Most policies only pay up to 50 per cent of the previous year's earnings, net profits for the self-employed.

“These may not include all of their expenses if they pay for things via their business."

He continues: “And if they're switching from employed to self-employed and giving up sick pay, it may take a while to build up earnings."

Additionally, he suggests self-employed clients can increase their investment opportunities, particularly those running their own limited companies.

He says: "They are in control of their pension provision, and pension payments are about the only way to get money out of a company without paying tax."

Challenges and advantages

One potential challenge that is unique to self-employed workers when insuring their income against long-term ill health is around how they define their earnings, suggests Jamie Smith, a financial adviser at Foster Denovo.

He says: “Typically most insurers will provide a maximum benefit of between 50 per cent to 75 per cent of a self-employed worker's average net profit over the last three years.”

However, he outlines two potential issues with this: “First, the net profit may understate a worker's earnings and, secondly, self-employed earnings can vary significantly from year-to-year and it may be that a few years after setting up the plan, their earnings have changed.”

He adds: “Both of these could mean that a worker cannot get the level of cover they need."

But according to Mr Smith, the advantage self-employed workers have is the opportunity to establish their own employee benefits package and tailor it to their own personal situation.