3 ways to protect your finances if you’re self-employed

3 ways to protect your finances if you’re self-employed

Being self-employed has a lot of advantages. You can set your own hours, work from wherever you like, escape office politics, and enjoy more varied work.

Yet there are some things you miss out on when you become self-employed. You’re no longer entitled to Statutory Sick Pay, so you could struggle to pay the bills if you’re too ill to work. You might lose other valuable employeebenefits too, such as death-in-service cover or Critical Illness insurance.

It’s really important to think about how you and your family would cope if you lost your income because of illness or injury. Research by insurer LV shows 30% of self-employed people would run out of money in less than a month if an accident or illness prevented them from working. One in ten said they wouldn’t last any time without using long-termsavings.

When you’re self-employed, you have sole responsibility for ensuring you have a financial safety net should the worst happen. Here are three ways to protect your finances if you’re self-employed.

1. Protect your income with Income Protection insurance

Many people assume the state will look after them if they lose their income because of illness or injury. In reality, state benefits are unlikely to cover your outgoings.

Assuming you qualify, the government’s Employment and Support Allowance provides a maximum of £73.10 a week if you’re deemed fit enough to return to work, or £111.65 a week if you aren’t deemed fit enoughto return to work.

A survey by LV found self-employed people have averaging outgoings of £262.83a week, so if you rely on the state you could face severe financial difficulties. This is where Income Protection comes in. Income Protection pays out a monthly income if you can’t work and lose your income because of ill-health or injury. Some of the key features include:

  • Income Protection pays out up to 70% of your gross monthly income
  • It covers both physical and mental illnesses
  • You can usually claim multiple times
  • You can choose between short-term income protection, which pays out for one, two or five years, or long-term income protection, which pays out until you return to work or retire
  • You can choose to receive payouts from day one of your illness or defer them, typically by up to 12 months

Some insurers provide rehabilitation services alongside Income Protection insurance. This might help you return to full health, and work, more quickly.

2. Protect against serious illnesses with Critical Illness cover

Income Protection is useful for covering your regular outgoings, but if you’re diagnosed with a very serious illness, you might find it reassuring to have a lump sum of money for paying off debts or making alterations to yourhome.

Critical Illness cover pays you a tax-free lump sum of money if you’re diagnosed with a severe illness such as heart attack, stroke or serious types of cancer.

Unlike Income Protection, it usually only pays out once and it doesn’t cover things like stress or back problems. You need to be extremely ill or disabled to be able to make a claim. Having said that, according to the Association of British Insurers, insurers paid out a total of £1.2 million in critical illness claims in 2019.

Critical Illness insurance varies from one insurer to another, so it’s important to check which illnesses are covered and how ill you must be to make a valid claim.

3. Protect your loved ones with life insurance

The third type of protection to consider is life insurance. This pays a lump sum of money to your loved ones if you die during the policy term.

Some employers provide a type of life insurance called death-in-service cover, which pays out a multiple of your salary. This would have ended when your employment stopped, and you became self-employed.

Many people take out life insurance to pay off their mortgage, enabling your family to own their home debt-free. If this is your priority, you might want to consider ‘decreasing term’ life insurance, whereby the level ofpayout reduces over the length of the policy in line with your capital and interest mortgage repayments.

If you have a family who rely on you financially, life insurance will provide you with the peace of mind that they won’t suffer financially if you die sooner than expected.

Get in touch

We can advise you on the right protection for your needs and circumstances, so you can rest safe in the knowledge that you’re protected against the unexpected. Request a callback or call us on 03300 583 859.