Protection  

Why protection for the self-employed is more important than ever 

  • Describe the importance of income protection for the self-employed
  • Identify the factors affecting premiums
  • Explain some of the key points about income protection policies
CPD
Approx.30min

Do you need IP insurance if you are self-employed?

When considering if IP insurance is right for a client, there are a few questions to ask.

  • If you get ill or are injured and cannot work, will you still be able to look after yourself and your loved ones financially? 
  • If you stop receiving any income, is there anything else that could help you get by, like savings?
  • How would you pay everyday bills such as your mortgage or rent, utilities, food, and other general living costs?
  • As well as continuing to support loved ones, would you be able to keep your business afloat?

How IP insurance works when you are self-employed

If your client cannot work because of illness or injury, IP insurance will pay them regular money each month. Depending on the policy they have chosen – and if the claim is successful – they will receive payments:

  • Until they are fit to return to work;
  • For a set amount of time;
  • Until the end of the policy term; or
  • Until they retire.

With most IP insurance, you can make as many claims as you like while the policy lasts. When you first take out the policy, you can normally choose:

  • How much money you will receive if you need to make a claim;
  • How long your policy will last for, and 
  • How long the deferred period is. 

However, depending on the chosen IP policy, there may be certain limits or restrictions.

Deferred periods explained

A deferred period is how long you need to wait until you get your first payment after making a successful claim. This can be anything from four to 52 weeks, and some insurers even offer a period of 104 weeks.

You can normally specify how long this deferred period will be when you first take out the policy. Though, again, the particular IP policy you choose may have some limits or restrictions.

The longer the deferred period is, the lower the monthly payments. However, it is important to get a good measure of how long your client could realistically wait for their first payment when you are helping them calculate how long the deferred period should be.

How much IP do you need when you are self-employed?

Self-employed people do not always earn the same amount each month. That is why when you are calculating how much IP your client needs, it is better to look at their monthly outgoings. Ask them to write a list of essential expenses that would continue if they could not work, such as mortgage or rent, utility bills, food and childcare.

Bear in mind that IP payments are tax free and remember IP is not meant to cover all their lost earnings or monthly outgoings, just some of them. You should also consider:

  • What state benefits they may be entitled to;
  • Other monies they have access to, such as savings, and how quickly they would be used up; and
  • Whether they have any other insurances, which include some form of IP.

The cost of monthly premiums depends on individual circumstances, but will be affected by:

  • Your client’s occupation: if your client works on a building site, they are statistically more at risk of having an accident while working than an office worker is.
  • Your client’s age: the older someone is when they take out a policy, the higher their premium will be because they are more likely to suffer an injury or become ill.
  • Your client’s health: if your client has any pre-existing conditions, depending on how severe they are, this could increase the premiums, or the condition could be excluded from their cover.
  • How much IP benefit the client wishes to receive: the more this is, the more they will have to pay each month in premiums.
  • How long the deferred period is: the longer they go before receiving the first payment, the lower their premium will be.
  • When your client wants their policy to end: the longer a policy lasts, the higher the premiums will be, but a client may need the policy to run until retirement or until the end of a long-term financial commitment, like a mortgage. 

Factors to be aware of 

IP insurance pays out if the policyholder cannot work because of illness or injury. But who decides if you are able to work or not?

Every insurer or policy has a definition of what 'incapacity’ is. Those offering ‘own occupation’ will pay out if the policyholder cannot perform in the type of job they have at the point of making a claim.

There are other definitions that give less cover, but they might come with extra conditions, such as having to return to work in a different but suitable role based on the policyholder's skills, qualifications and experience. Or they may only pay out if the policyholder is unable to do certain daily activities, such as climb the stairs without help.