How to be prepared for a rainy day
Being self-employed has its benefits in that you have flexibility over your work hours and your level of income. However, this flexibility comes with some complexities. What happens if you are ill and cannot work at your business? What happens if you become incapacitated or disabled and cannot carry out your normal business?
These questions are more daunting for self-employed people than people who are formally employed. This is because with employed people, there is the possibility of getting sick pay from their employers or even a disability claim whilst they are unable to work. This option is not available to people who are self-employed. Self-employed people have to make alternative arrangements to ensure a source of income in the event of falling ill or becoming incapacitated.
The good news is that there are plenty of insurance products that are tailored for self-employed people to cover this uncertainty. Whilst income protection products are available for both employed and self-employed people, the reality is that the way products are tailored for self-employed people is more sophisticated. But, first things first, let us take a look at what income protection in general is.
What is income protection?
Income protection is an insurance policy that pays out when you are unable to work due to illness or injury, in return for monthly premiums. This will provide you with a source of income in the period you are not able to work. The extent of the income you get will depend on the level of cover that exists within your income protection plan. You will get a percentage of your current income.
For self-employed people, you can get products that cover between 50% and 70% of your share of annual pre-tax profits from your business. This is normally done on the previous year’s pre-tax profits, but this varies between insurance providers. This income can be provided on either a short term or long term basis. On a short term basis, the income is provided for a period not exceeding 12 months, whereas on a long term basis, the income is paid for more than 12 months, the exact period will be defined within your policy terms and conditions.
What conditions are covered by the policy?
Normally income protection policies cover a wide range of conditions should you fall ill. This includes conditions such as stress, back conditions, heart disease and cancer. The exact list of conditions covered varies between providers, but this is key before you sign up for income protection. Normally, the more conditions are covered by the policy, the more expensive your monthly premiums will be. It is also important to note that you will not be able to get cover for pre-existing medical conditions. The main issues with pre-existing conditions that providers have is with regard to mental illness (depression, anxiety) and skeletal issues (back/neck/spine) if you have suffered from these in the past 5 years. The provider will normally exclude these conditions from your cover.
Will I still pay tax on the income I receive from the income protection policy?
The good news is that if you took out the policy yourself, that is, if you pay the premiums for it by yourself, the income you receive from the policy will be tax-free.
What happens if I recover and can work again?
Should you recover, your claim for that period will end. This does not mean that your policy lapses. It just means that you will have to rely on the income you are currently making within your business. You can make multiple claims on the same policy should you fall ill or become injured again
What government benefits are available if I fall ill and cannot work?
There are benefits that are available through the Employment and Support Allowance (ESA). This will provide you financial support in this case, as well as, personalised help to allow you to work if you are able to such as setting goals and improving your current set of skills. This is available for self-employed people as well as employed people.
In order to receive this, you need to meet the following conditions;
· Be under State Pension Age
· You should not be receiving Statutory Sick Pay or Statutory Maternity Pay and you have not gone back to work
· You should not be receiving Jobseeker’s Allowance
There are various rules and limitations that determine exactly how much you will get paid as your allowance. You would need to consult your financial adviser to do a benefits calculation for you.
