According to recent research from Statista there are currently 4.25 million self-employed workers in the UK. Although this figure is down from a record high of over 5 million in 2020 it still equated to 13.7% of our total work force.
Although hard work, the benefits of being your own boss and reaping the financial returns of commercial success can be extremely rewarding.
Despite these obvious and exciting perks, being self-employed can make you and your loved ones more vulnerable.
Whist many people enjoy the added security of sick pay through their employer and the convenience of statutory sick pay (SSP) to see them through if required, self-employed workers must rely on the new style employment and support allowance (or ESA).
If you are currently unable to work but plan to return in the future, under the new style ESA scheme you could receive £77 a week. Alternatively, if you were to struggle to return to work, you could receive up to £117.60 per week.
Would this be sufficient to cover all your financial needs?
It is reported that 60% of working families in the UK would see their income fall by more than a third if the main household earner had to stop working.
Therefore, if you are self-employed, securing additional financial protection for you and your loved ones could be vitally important to ensure your standard of living is not negatively impacted and to guarantee invaluable peace of mind.
But what are the best policy options available for self-employed workers?
Income protection insurance
A great option for self-employed workers is income protection insurance.
Income protection basically provides financial cover if you are unable to work due to an injury or illness (named in the policy).
It can pay out up to 70% of your usual income to ensure you and your loved ones are able to continue paying the mortgage/rent, meet family living costs, pay utility bills etc. At the present time with inflation rising to over 10% and energy bills soaring this is particularly relevant.
You will receive monthly tax-free payments until you are able to return to work, effectively mimicking your self-employed income.
The payments will either continue for between 1 and 2 years (short term cover) or potentially up until you retire (long term cover).
Sounds good right?
Yes, income protection can be a great way of securing your financial future however there are several things to consider before deciding on this policy option.
The deferred period – You will need to wait for your deferred period to expire before you can make a valid claim and receive the payments. The deferred period is usually between 4 weeks to 52 weeks.
The definition of incapacity – In order to be able to successful claim on your income protection policy the injury or illness which stops you from working must be one that matches your policies definition of incapacity.
There are 3 commons forms of incapacity: own occupation, suited tasks and any tasks. The most comprehensive form of cover and normally the most suited to self-employed workers is own occupation and will allow you to make a claim if you become too ill or injured to carry out your specific job role and its associated tasks.
Premium type – Depending on the policy, your premiums could be guaranteed (remain the same throughout the policy), reviewable (change over time) or age-banded (increase each year as you get older).
If you want to compare multiple income protection policies completely free of charge, you could use leading life insurance broker; Reassured Advice.
Executive income protection
Executive income protection is a specific form of income protection insurance that can be taken out by small to medium size businesses to cover the income of key selected employees.
It can be a tax-efficient option for those operating limited companies to secure income protection. This is because the premiums paid can then be claimed back as a business expense, making them tax deductible.
Leading insurers such as Legal & General and LV= offer executive insurance policies.
For example, Legal & General’s executive income protection comes with the benefits:
- Protects up to 80% of a key employee’s income (up to a maximum of £25,000 a month)
- Includes pension contributions, national insurance and any dividends
- Benefit amount can be level (remains the same) or increasing (will increase overtime. Premiums will also increase as a result)
- 5 year minimum term and the policy must end before the policyholder turns 70
Life insurance
Whereas income protection provides cover whilst you are still alive but unable to work, life insurance provides protection for our loved ones after we are gone.
Again, you pay a monthly premium in order to receive cover, however instead of receiving a monthly income your dependants receive a single cash lump sum.
There are different types of life insurance available however self-employed workers will usually choose between either level term cover or decreasing cover.
Level term life insurance provides a fixed (or level) cover amount. If you were to pass away during the lifetime of the policy (or term) then a fixed cash sum will be paid out.
In contrast decreasing term life insurance provides a cover amount which reduces in value over the policy term. It is commonly used to mirror the balance of a repayment mortgage and because the risk to the insurer reduces over time decreasing term is usually the most cost-effective option.
A pay out from a life insurance policy will often be used to
- Cover or clear the mortgage
- Meet future family living costs
- Provide an inheritance
- Clear any outstanding debt
- Cover high funeral costs
As with all insurance, the greater the level of cover, the higher the premium. Therefore, it is usually a good idea to calculate the exact level of cover (known as the sum assured) you require.
Your age, smoking status and medical history are also all key factors which will impact the cost of your premium. However, if you are in your 20s, a non-smoker and do not have a pre-existing medical condition you could secure £200,000 of cover for approximately 20p-a-day.
Conclusion
The recent global COVID-19 pandemic has reminded us that no one knows what may be around the corner, further emphasising the importance of having financial cover in place. This need is even greater for self-employed workers who do not have the added security provided by an employer.
However, as explored above there are multiple options available to you to help provide necessary protection and reassuring peace of mind.
Income protection is a great, cost-effective option for those wanting to protect their income. While life insurance is an excellent option if you want to ensure your family are adequately provisioned for if you were no longer around to provide.
If budget allows it is possible to take out both income protection and life insurance simultaneously for the most comprehensive cover solution.
Whatever your individual circumstances, it is well worthwhile taking the time to consider how you and your family may cope if anything were to ever happen to you and which policy may best meet your needs.