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.
