5 Reasons Self-Employed Workers Need Income Protection

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This is a collaborative post.

Research from one of the UKs leading income protection providers, the Exeter, discovered that in 2020 nearly a fifth of self-employed workers had no savings at all. On top of this, only 9% protect their income with insurance.

In a world thats still facing great uncertainty due to the Coronavirus pandemic, self-employed workers should ask themselves could I live comfortably using my savings if I became too ill or injured to work for an extended period of time?’.

If youre part of the 31% of self-employed workers that have less than £2,000 in savings, you may benefit from income protection insurance.

Income protection is an insurance policy that will pay out a percentage of your usual income (often up to 70%) should you be left unable to work following an accident that leaves you injured or during periods of ill health.

Policies can be taken out on a short-term or long-term basis, with short-term policies paying out for a maximum of two years. While long-term income protection has the potential to pay out until you retire – thus providing cover for your whole working life.

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Below, Reassured (an award-winning UK broker), explores their top five reasons self-employed workers should consider taking out income protection:

1. Replace lost earnings 

The main benefit of income protection is that it can help to replace lost earnings while youre too ill or injured to work.

 As a self-employed worker, your work can be your pride and joy and it can be devastating when youre unable to carry out your job – both mentally and financially.

 Those in employment have the benefit of receiving sick pay during these times, but unfortunately self-employed workers dont benefit from this.

This means that if youre unable to work youll need to find your own forms of finance to help you make ends meet. This can be difficult if you dont have your own savings to fall back on.

This is where income protection can provide a much-needed financial safety-net for self-employed workers.

 You may want to read this helpful nine ways to save every day article.

2. Flexible terms to help meet your needs

 When taking out an income protection you can choose between a range of policy terms to ensure your cover is exactly what you need. This includes:

Choosing between short or long-term cover

Short-term cover typically has a maximum payment period of up to 2 years, whereas long-term cover can last up until retirement.

Due to the longer period of cover, self-employed workers are likely to benefit more from having a long-term policy. However, if youre on a strict budget, short-term polices can help to provide you with some form of protection at a cheaper price.

Setting your deferred period

The deferred period refers to the time in between making a claim and receiving your pay outs. This could be from 4 weeks up to 52 weeks (depending on the provider). If youre still unable to work once your deferred period has passed, youll start to receive your payments.

Choosing a definition of incapacity 

Your definition of incapacity will help to define what youre covered for. Typically, there are three main definitions of incapacity to choose from:

Own occupation – This is the most comprehensive option as youll be able to claim if youre unable to perform your specific job. You wont be asked to do any other job.

Suited tasks – Youll be able to claim if youre unable to do your job or any jobs that suit your skills and experience. This means you may have to do a different job while youre unable to do your own.

Any occupation – You must be able to not work in any occupation to claim. This option could be beneficial for self-employed workers with dangerous jobs where the potential injuries that could be sustained are likely to meet this definition.

Choosing your premium payment type

Youll also have the ability to choose how youd like to pay for your premiums. Premium types can vary between providers but, in general, you can choose between:

Guaranteed premiums – These are premiums that remain fixed throughout the lifetime of your policy.

Reviewable premiums – These are premiums that may change throughout the lifetime of your policy (for example, due to increase risk or increasing in age).

Age-banded premiums – These are premiums that will increase each year as you age.

3. Cover essential costs

If youre able to receive some form of income while youre unable to work, through an income protection policy, then youll be able to cover essential financial commitments.

The monthly payments you receive from an income protection policy can help to keep you afloat financially and allow you to continue living your currently lifestyle without having to make major cutbacks.

Income protection payments arent tied to any specific commitments, so you can use them however you see fit. This could be to:

Keep up with monthly mortgage or rent payments

Pay household bills (gas, electricity, internet, water etc)

Keep up with loan or debt payments (car finance payments, credit cards etc)

Pay for childcare fees

Afford daily living costs (food shop, petrol, etc)

Pay for any private treatment thats needed for your illness or injury

Pay for leisure activities

Whatever you pay for using your usual income can be covered by income protection.

 4. Allow yourself to fully recover 

The financial strain of being unable to earn an income can force many self-employed workers into returning to work to before a full recovery has been made.

While this could stop you from falling on hard times in the short-term, it could make things worse and lead you to having to take more time off in the long run if youre not giving yourself time to fully recover.

By having an income protection policy in place, youll have peace of mind that you can have as much time off as you require while still receiving part of your income to help you make ends meet.

This will allow you to return to work once a full recovery has been made.

It can also be possible to make multiple claims on your policy. So, if you experience another period of ill health or injury, you can make claim and receive monthly payments until youre well enough to work again.

5. Protect yourself for your whole working life

When taking out a long-term policy you could choose a pay out term to last you until you reach retirement age. Meaning if you were to fall ill or injured and ended up in a position where you were unable to work again, you could still receive a regular income. 

Being in this position can often mean you have to rely on state benefits, such as universal credit to get by. As per the current universal credit guidelines, a couple over the age of 25 would be entitled to £509.91 (for both parties) each month, with additional allowance being added for each child.

 While receiving state benefits could help to support you financially, with the average household spending in the UK currently at £2,588¹, its unlikely to be enough to cover all essential costs – meaning you could face having to make lifestyle changes to fit your new budget.

An income protection policy will pay out up to 70% of your usual income, which could allow you to be in a much better financial situation and allow you to continue with your current lifestyle (without having to make drastic cutbacks).

The past two years have been extremely challenging for many UK families both from an emotional and an economic perspective.

Recent times have taught us that ones health simply cannot be taken for granted.

However, having a financial safety blanket in the form of income protection can provide reassuring peace of mind especially for those who are self-employed.

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