If you’re self-employed, you need to choose your income protection insurance carefully.
One consequence of the pandemic is a rise in people becoming self-employed.
While the freedom of self-employment is welcome, you also lose access to some valuable employee benefits, including sick pay.
Without cash in the bank to see you through a period of sickness, income replacement insurance is a valuable option to consider, paying out if you can’t work due to illness or disability.
According to new research from Defaqto, based on their analysis of financial products, there are 56 long-term income protection policies available from 24 different insurance companies, all potentially suitable for someone self-employed.
However, the cover offered by these policies does vary. Self-employed people need to choose with care.
First, the definition of disability used to make a claim may vary depending on how risky your occupation is.
It’s best if the policy pays out if you cannot do your own job rather than relying on a harsher’ activities of daily work’ test, for example.
The choice of payment term is essential.
In the event of a claim, some policies will pay out until you are well again or until the end of the policy (whichever is sooner), while others will only payout for a limited period, say 12 or 24 months.
Limited payment terms are cheaper but might leave the policyholder vulnerable in the event of a long-term claim.
It’s not uncommon for insurers to report average payment terms of up to seven years from income replacement insurance policies!
The choice of the deferred period is really important.
Most policies don’t start paying a benefit until three months have elapsed so that they can dovetail with an employer’s sick pay scheme.
But self-employed people most likely would require a replacement income straightaway.
You, therefore, need a policy with a shorter deferred period, such as one month, one week or even day one cover.
Making the wrong choice of deferred period could result in you being unable to pay your bills.
Since the pandemic, only three mainstream providers are offering “day one” cover and only five are offering a one-week deferred period.
Financial advice is critical when considering income replacement insurance.
Buying these products online and making the wrong choices could result in you having a product unsuitable for your needs.
Self-employed people should take financial advice because a qualified financial adviser can help establish the most cost-effective and tax-efficient solution.
For example, many people running their own businesses do so through their own limited company, which technically means they are employed. Their financial adviser can arrange executive income protection for them – typically a more tax-efficient option.
The Furlough scheme highlighted the need for Income Protection
Ben Heffer, Income Protection Expert at Defaqto, said:
“Working away from the office during the pandemic has whetted people’s appetites for running their own businesses. This is great, but away from the employed environment, income protection insurance is essential, making the right product choices is crucial, and financial advice indispensable.”
