Securing protection for self-employed clients

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Securing protection for self-employed clients

While being self-employed does not necessarily make access to insurance more difficult, it is vital individual circumstances are thoroughly considered.

Essentially, this means advisers need to build and find protection policies to match the specific needs of the self-employed client, says Kathryn Knowles, managing director of Cura Financial Services.

Ms Knowles explains: “Arranging life and critical illness insurance when you are self-employed is no different to employed workers in most circumstances for personal or business protection.”

There is often a misconception that those who are self-employed have a greater need for protection advice than those who are employed.Jiten Varsani

She suggests the trickier part can be finding the right income protection and unemployment cover, while the main consideration for the client is their occupation class and affordability.

Ms Knowles adds: “It is more the income protection side of things that has a few quirks, and I do think that speaking with an adviser is a good idea.”

Protecting income

Whether the client is a sole trader or a director of their own company, IP can be arranged subject to the policy terms and conditions and personal circumstances, suggests Jiten Varsani, mortgage and protection adviser at London Money.

He explains: “There is often a misconception that those who are self-employed have a greater need for protection advice than those who are employed.

“Though this may be the case in certain circumstances, it really does come down to the benefits offered to those who are employed.”

And for those running and employed by their own limited companies, it is possible to make the premiums of some life insurance policies, or  'relevant life' plans, tax-deductible, according to Philip Hanley, director and independent financial adviser at Philip James Financial Services.

So there should be no significant differences in the ability of business owners to get life or critical illness protection, which would be underwritten based on health.

Mr Hanley adds: “Any occupational restrictions for dangerous jobs would apply whether they are employed or self-employed.”

Nevertheless, it does not have to be any more difficult than finding suitable protection policies for an employed worker.

“Depending on the nature of the work – contracts and gig-workers – it may need some extra consideration,” says Ms Knowles.

“Unemployment is the trickiest. It is possible, but proof of unemployment at claim stage is harder to confirm," she continues. "Some income protection policies, though, guarantee a monthly benefit of £1,000 even if the person earns less than this (no financial proof at point of the claim).

"Some also offer a guarantee of £1,500 per month, even if income fluctuates, as long as you provide proof of earnings soon after the policy commences."

She adds: “Some people class themselves as self-employed but actually own limited companies, which can open up a whole new world of products when it comes to group protection."

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.

He says: “Yes, they will have to pay the cost of the cover themselves, but for small company owners who choose to remain self-employed, it might be possible for their limited company to pick up the cost as a tax-deductible expense which can have tax advantages.”

But it is also important to remember that while advice can help people to understand the importance of these insurances, the industry needs to be careful not to scare people into buying these policies, warns Ms Knowles.

She says: “Access can be greatly improved by using an adviser if someone has health factors, a high-risk job, travel or hobby.

"IP is really the standout policy if you look at it purely from employment status.

"[But] the self-employed cannot fall back onto statutory sick pay or the benefits of group insurance to maintain their income and standard of living."

She continues: "As with anyone with a mortgage or family, life insurance is probably going to be useful and it will be far more attractive than IP because it is so much cheaper."

victoria.ticha@ft.com