If you’re self-employed, your ability to work can be directly linked to your ability to earn.
Unlike an employee, you may not have an employer providing sick pay if illness or injury prevents you from working. Your income could reduce significantly while your mortgage or rent, household bills and other financial commitments continue.
Income protection can provide a regular income if you’re unable to work because of illness or injury and meet the conditions of your policy.
However, arranging income protection when you’re self-employed can involve some additional considerations.
Your business structure, how you pay yourself, how long you’ve been trading and how your income is evidenced can all affect the amount of cover available.
Quick Answer: Can Self-Employed People Get Income Protection?
Yes. Income protection is available to self-employed people, including sole traders, limited-company directors, contractors and freelancers.
If you’re unable to work because of illness or injury and meet your policy’s definition of incapacity, income protection can pay a regular benefit after an agreed waiting period.
The important part for a self-employed applicant is establishing how much of your income can be insured.
An insurer may need to consider your earnings, business structure and evidence of income when determining the level of cover available. Different insurers can also take different approaches to self-employed income.
At Oportfolio Mortgages, our protection advisers can help you understand how your income is likely to be assessed and compare income protection policies based on your occupation, earnings and wider circumstances.
Review My Income Protection Options
How Does Income Protection Work If You’re Self-Employed?
Income protection is designed to replace part of your income if illness or injury prevents you from working and you meet your policy’s definition of incapacity.
The basic process is:
You become unable to work → you make an eligible claim → the agreed waiting period passes → the policy begins paying a regular benefit.
Depending on the policy, payments may continue until you:
- recover and return to work;
- reach the maximum benefit period;
- reach the end of the policy term; or
- reach another point specified by the policy.
The money can help you continue meeting everyday financial commitments such as your mortgage or rent, household bills, food and other living expenses.
This is different from critical illness cover.
Critical illness insurance can provide a lump-sum payment following diagnosis of a condition covered by the policy where its definition is met. Income protection instead focuses on whether illness or injury has affected your ability to work, subject to the policy terms.
For somebody who is self-employed, the important additional question is what income the insurer will recognise when establishing how much cover you can have.
Why Can Income Protection Be Particularly Important If You’re Self-Employed?
One of the biggest differences between being employed and self-employed is the financial support that may be available if you’re unable to work.
Eligible employees can receive Statutory Sick Pay and some employers provide additional contractual sick pay or workplace benefits.
If you’re genuinely self-employed, you aren’t eligible for Statutory Sick Pay.
You may therefore have to rely on your own savings, business income, other household income or any state benefits you’re eligible to claim if illness or injury prevents you from working.
At the same time, your financial commitments could continue.
These might include:
- mortgage or rent payments;
- household bills;
- food and everyday expenses;
- loan or credit commitments;
- childcare and family costs; and
- certain business expenses.
For example, imagine you’re a self-employed consultant and your household relies primarily on the income you generate through your business.
If an illness prevented you from working for six months, the financial impact wouldn’t necessarily be limited to the business. Your personal income could also reduce at the same time that your mortgage and household costs continue.
Income protection is designed to address some of this risk by providing a regular benefit following an eligible claim.
The important question is therefore:
If your income stopped tomorrow because you couldn’t work, how long could you continue meeting your financial commitments?
How Much of My Self-Employed Income Can I Protect?
Income protection isn’t normally designed to replace 100% of your earnings.
Instead, insurers generally allow you to protect a proportion of your income, with the maximum amount depending on the insurer and policy.
MoneyHelper says income protection will typically pay between 50% and 65% of income, although the actual percentage available can vary between policies.
For somebody who is self-employed, however, there is another important consideration:
What does the insurer count as your income?
This isn’t always as straightforward as looking at the amount of money coming into your business.
A sole trader, limited-company director and contractor could each generate what appears at first glance to be £80,000 of income from their work but structure and report those earnings very differently.
The amount of protection available can therefore depend on factors including:
- how your business is structured;
- how you receive your income;
- your trading history;
- the financial evidence available;
- whether your earnings fluctuate; and
- the insurer’s individual criteria.
This is why it’s important to establish how an insurer is likely to assess your earnings rather than simply choosing a level of cover based on your business turnover or headline income.
How Do Insurers Calculate My Income If I’m Self-Employed?
Insurers don’t all assess self-employed earnings in exactly the same way.
The information required can depend on how your business is structured, how long you’ve been trading and how you receive your income.
Sole Traders
If you’re a sole trader, your business turnover isn’t necessarily the same as your personal income.
You may have significant business expenses that need to be deducted before arriving at the profit generated by the business.
An insurer may therefore ask for evidence of your earnings, which could include tax calculations, tax year overviews, accounts or other financial information depending on its requirements.
Limited-Company Directors
Income can be more complicated for a limited-company director because you may receive money from the business in several ways.
For example, you might take a relatively modest salary alongside dividends while leaving some profit within the company.
Different insurers can take different approaches to company-director income and the evidence they require.
This means you shouldn’t assume that the figure used for another financial purpose will automatically be the same figure every income protection insurer is prepared to use.
Contractors and Freelancers
Contractors and freelancers can also have earnings that vary throughout the year.
You might work on fixed-term contracts, charge a daily rate or have periods between projects when your income is lower.
An insurer may therefore want to understand your earnings history and how your income is generated before determining the amount of cover available.
What If My Income Fluctuates?
Fluctuating income doesn’t automatically prevent you from getting income protection.
However, it can make establishing an appropriate level of cover more important.
A particularly strong year may not necessarily represent your normal long-term earnings, while using an unusually weak year could potentially understate your typical income.
The insurer’s approach and the financial evidence required can vary.
This is one reason why comparing insurers can be particularly valuable for self-employed applicants with irregular, seasonal or complex earnings.
What Does Self-Employed Income Protection Cover?
Income protection isn’t usually best understood as a list of individual illnesses that are either “covered” or “not covered”.
Instead, the key question is generally whether illness or injury prevents you from working and whether you meet the policy’s definition of incapacity.
Depending on the policy and your individual underwriting, this could potentially include periods away from work caused by physical or mental health conditions.
However, policies can contain exclusions, restrictions and different definitions of incapacity.
Your medical history, occupation and other factors can also affect the terms you’re offered.
This is why it’s important to check:
- how the policy defines being unable to work;
- any medical exclusions applied to your cover;
- occupational restrictions;
- when the policy can pay; and
- any other relevant exclusions or limitations.
Don’t assume that two income protection policies provide identical cover simply because the monthly benefit looks similar.
Example: A Limited-Company Director
Imagine a company director runs a profitable business but chooses to take a relatively modest salary and dividends while retaining some profit within the company.
Their personal income might therefore look quite different from the overall amount of money generated by the business.
When arranging income protection, the insurer will need to establish what earnings it is prepared to recognise and what evidence it requires before determining the amount of cover available.
Another insurer could potentially take a different approach.
This is why a self-employed applicant shouldn’t assume that the income figure used for their mortgage, tax return or company accounts will automatically be treated in exactly the same way by every income protection provider.
Understanding how the insurer assesses your particular income structure can be just as important as comparing the headline features of the policy.
What Happens If My Self-Employed Income Changes?
Self-employed income doesn’t always remain consistent.
Your business might grow significantly, you could lose a major client, change the way you pay yourself or experience a period of lower earnings.
If your income changes materially after arranging income protection, it’s sensible to review your cover.
If your earnings increase significantly, your existing benefit may no longer provide the level of protection you want.
If your earnings fall, you shouldn’t assume that a policy arranged when you were earning more will necessarily pay the full original benefit following a claim.
The amount payable can depend on the terms of the policy and the income evidence required by the insurer at the time of a claim.
You should therefore understand how your policy deals with changes in earnings and review your protection following significant changes to your business or personal income.
A protection review doesn’t automatically mean replacing an existing policy. The purpose is to establish whether your current cover still reflects your circumstances.
How Long Do I Have to Be Off Work Before Income Protection Pays?
Income protection doesn’t necessarily start paying as soon as you’re unable to work.
Policies normally have an agreed deferred period, sometimes referred to as a waiting period.
This is the period between becoming unable to work and eligible benefit payments beginning.
The deferred period you choose can affect both how quickly you could receive financial support and how much the policy costs.
When deciding what may be appropriate, consider how long you could manage using:
- personal savings;
- household income;
- business reserves available to you;
- any existing insurance;
- other financial resources; and
- any benefits you’re eligible to receive.
For example, somebody with sufficient savings to cover six months of household expenses may have different requirements from somebody who would struggle financially after one month without income.
A longer deferred period can often reduce the cost of cover, but it also means you need to support yourself for longer before an eligible claim begins paying.
The appropriate waiting period should therefore reflect both your budget and how long you could realistically manage without your usual income.
How Long Can Income Protection Pay Me For?
How long income protection can pay following an eligible claim depends on the type of policy you arrange.
Some policies have a limited benefit period, meaning an individual claim can be paid for a maximum period specified by the policy.
Other policies can potentially provide benefits for much longer, subject to the policy terms, while you continue to meet the definition of incapacity.
Depending on the cover, payments could stop when you:
- recover and return to work;
- no longer meet the policy’s definition of incapacity;
- reach the maximum benefit period;
- reach the end of the policy term; or
- reach another contractual endpoint.
Longer potential benefit periods can provide more extensive protection, but they can also affect the cost of the policy.
When comparing cover, don’t look only at the monthly benefit.
Consider how long that benefit could potentially be paid if you experienced a serious illness or injury that kept you away from work for several years.
Does Income Protection Cover Mental Health and Back Problems?
Income protection can potentially cover an inability to work caused by a range of physical and mental health conditions, subject to the policy terms and underwriting.
The important factor is generally whether your condition results in incapacity that meets the definition in your policy.
However, your medical history can affect the terms you’re offered.
For example, an insurer may ask additional questions about previous health conditions and could apply an exclusion or other restriction depending on your circumstances.
You shouldn’t therefore assume that a particular condition will automatically be covered or excluded.
If you have an existing or previous medical condition, checking how different insurers are likely to approach it before applying can be particularly important.
Can I Get Income Protection If I’ve Only Recently Become Self-Employed?
Potentially, but having a shorter trading history can affect the information available to an insurer.
Someone who has been self-employed for several years may have established accounts, tax documents and a longer earnings history.
If you’ve only recently started trading, there may be less historic evidence showing what you normally earn.
That doesn’t automatically mean income protection is unavailable.
The approach can depend on the insurer, your occupation, previous employment, current earnings, business structure and the financial evidence available.
If you’ve recently moved from employment into self-employment, it’s therefore worth establishing which insurers are prepared to consider your circumstances rather than assuming you need to wait several years before exploring protection.
What If I Have Savings or Money in My Business?
Having savings or money within your business can reduce how immediately exposed you are if you become unable to work, but it doesn’t automatically remove the need to consider income protection.
Start by asking how long those resources would realistically last.
For example, if your household costs £4,000 a month and you have £24,000 of accessible savings available for that purpose, those savings alone would represent approximately six months of expenditure, assuming your costs remained unchanged.
You should also distinguish between personal savings and money held within your business.
Business funds may already be needed for costs such as tax, salaries, suppliers, rent or other commitments and shouldn’t automatically be treated as personal emergency savings.
Some people may be comfortable relying on their own financial reserves for a period. Others may prefer insurance to reduce the risk of having to use substantial savings following a long-term illness or injury.
The important thing is to understand how long you could support yourself without your normal earnings and what would happen after those resources were depleted.
What Should I Look for When Comparing Self-Employed Income Protection?
There isn’t one income protection policy that’s automatically suitable for every self-employed person.
When comparing policies, look beyond the monthly premium.
Definition of Incapacity
Check how the insurer determines whether you’re unable to work and therefore eligible to claim.
This can be particularly important if your occupation involves specialist skills or physical work.
Amount of Income Covered
Establish how much of your earnings the insurer is prepared to protect and how it assesses your particular income structure.
Deferred Period
Check how long you would need to be unable to work before eligible payments begin.
This should be considered alongside your savings and other financial resources.
Benefit Period
Consider how long an eligible claim could potentially be paid.
Shorter and longer-term policies can provide very different levels of protection.
Premiums
Understand how the premiums work and whether they can change over time under the policy terms.
Exclusions and Underwriting
Check whether any exclusions or restrictions apply because of your medical history, occupation or other circumstances.
Approach to Self-Employed Income
This is particularly important for company directors, contractors and people with fluctuating earnings.
Two insurers may not necessarily assess the same income structure in exactly the same way.
The aim isn’t simply to find the cheapest policy.
It’s to find cover that reflects how you earn your income, what you need to protect and how long you would need financial support if you couldn’t work.
Income Protection vs Critical Illness Cover for the Self-Employed
Income protection and critical illness cover protect against different financial risks.
Income protection can provide a regular benefit if illness or injury prevents you from working and you meet the policy’s definition of incapacity.
Critical illness cover can provide a lump-sum payment if you’re diagnosed with a condition covered by the policy and meet its definition.
For a self-employed person, the distinction is important.
You could experience an illness or injury that prevents you from working without necessarily meeting the definition required for a critical illness claim.
Equally, a critical illness lump sum could potentially provide financial flexibility following a serious diagnosis that goes beyond replacing your monthly income.
Neither type of protection is automatically more appropriate for every self-employed person.
The relevant question is which financial risks you want to protect against and what existing resources you would have available if something happened.
Oportfolio Insight
When we speak to self-employed clients about protection, one of the first things we consider is how dependent their personal finances are on their ability to continue working.
Business owners will often insure equipment, vehicles, premises and other assets because they recognise the financial consequences of losing them.
But their ability to generate an income can be just as important to their household finances.
For a sole trader, contractor or company director, being unable to work could affect both the business and the income available to pay the mortgage, household bills and other personal commitments.
The complexity is that self-employed income isn’t always straightforward.
A company director taking salary and dividends can look very different from a sole trader reporting taxable profit or a contractor working on a daily rate.
That’s why we don’t believe self-employed income protection should simply be approached by finding the cheapest policy.
We look at how you earn your money, your occupation, financial commitments, savings, existing protection and how long you could manage without your usual income before considering where there may be a protection gap.
Need Help Protecting Your Self-Employed Income?
If you rely on your business or self-employed work to support your household, it’s worth considering what would happen financially if illness or injury prevented you from working.
At Oportfolio Mortgages, our protection advisers can review how you earn your income, your occupation, mortgage or rent, household commitments, savings and existing protection.
We can then help you understand how different insurers may assess your circumstances and compare income protection options based on the cover you actually need.
Whether you’re a sole trader, limited-company director, contractor or freelancer, the aim is to arrange protection that reflects how you earn your income and the financial commitments that income supports.
