Business Protection for Sole Traders
Sole trader is the simplest way to be in business and the one with the fewest protection options.
There is no separate legal entity. You and the business are the same person, which means the business cannot buy anything on your behalf, cannot claim the cost against corporation tax it does not pay, and cannot own a policy.
That is not a problem to solve so much as a fact to work around, and working around it means getting personal cover right rather than hunting for business products that do not apply.
The short answer
A sole trader has no company, which rules out most business protection: relevant life cover, executive income protection and keyman insurance all need a company to own and pay for them. What is left is personal cover, and because the business and the person are legally the same thing, personal cover is carrying the business as well as the household.
What this changes
- Relevant life cover is not available, because it requires an employer and an employee
- Executive income protection is not available for the same reason
- Keyman insurance has no company to own the policy or receive the proceeds
- Business debts are your personal debts, with no limited liability between them
- Business income is your income, evidenced through accounts or tax returns rather than payslips
- Anything you buy is bought personally, from income you have already paid tax on
The bit people miss
Unlimited liability is the part that catches people. A sole trader's business debts are personal debts, so a business loan, a lease or money owed to suppliers does not stop at the business: it reaches the house. If you die, those obligations form part of your estate and are settled before anything passes to your family. Personal life cover written in trust sits outside the estate and reaches your family directly, which matters considerably more here than it does for a company director.
Most Business Protection Needs A Company
It is worth being direct about this, because sole traders are regularly sold the idea that there is a business version of everything.
Relevant life cover is a death in service arrangement set up by an employer for an employee, so it needs both to exist. Executive income protection is a policy a company owns on an employee. Keyman insurance is a company insuring itself against losing somebody. All three depend on there being a company, and a sole trader does not have one.
So the honest answer is that the useful products are the personal ones, and the planning question is how much personal cover is needed given that it is also standing behind the business. If the business is growing, incorporating may change what is available, and that is a conversation for your accountant rather than a reason to buy something now.
The Business Does Not Survive You
A sole trade usually cannot be inherited or sold in any meaningful way, and that shapes what cover is for.
There is no entity to pass on. There are tools, perhaps a van, a customer list that belongs to a person who is no longer there, and work in progress that somebody else will have to finish or refund. Contracts are generally with you personally, so they end. The practical result is that a family is left with liabilities to settle and very little to sell.
So life cover is sized against the household plus any business borrowing, rather than against an expectation that the business raises money. That is usually a larger figure than people first suggest, and it is worth working out properly.
What usually fits, and why
Usually first, because there is no sick pay, no company to keep paying you and no second person to keep the business running.
The trust matters here because business debts are personal debts: a policy outside the estate reaches your family rather than your creditors.
A lump sum can settle business borrowing or fund somebody to run the business, neither of which a monthly benefit does well.
Common questions
Can a sole trader get relevant life cover?+
No. Relevant life cover is a death in service arrangement set up by an employer for an employee, so it needs a company and an employment relationship, and a sole trader has neither. The same applies to executive income protection and keyman insurance. The useful products for a sole trader are the personal ones.
Are my business debts covered by my life insurance?+
Only in the sense that your estate settles them. A sole trader has unlimited liability, so business borrowing is personal borrowing, and on death those obligations are paid out of the estate before anything passes to your family. Life cover written in trust sits outside the estate and reaches your family directly, which is why the trust matters more here than for a company director.
What should a sole trader arrange first?+
Income protection usually, because there is no sick pay, no company to keep paying you and nobody else to keep the business running. Life cover follows, sized to the household plus any business borrowing rather than to the business's value. Critical illness is worth adding where affordable, since a lump sum can settle borrowing or fund somebody to cover for you.
Would it help to become a limited company?+
It changes what protection is available, because relevant life cover and executive income protection become possible, and both are typically paid for by the company rather than out of taxed personal income. Whether incorporating is right for you overall depends on tax, liability and administration, and that is a conversation for your accountant rather than something to decide on insurance grounds alone.
How is my income evidenced for a claim?+
Through accounts or tax returns rather than payslips, and insurers generally work from taxable profit rather than turnover or drawings, which is often a lower figure than people expect. If your profit varies year to year it is worth discussing before you apply rather than at the point of claim, so that the benefit level is set against something you can evidence.
Cover that often goes with this
The gaps we most often find sitting next to this one.
- Self-employed income protectionHow cover works without sick pay.
- If you incorporateWhat becomes available once there is a company.
- Life coverIncluding why writing it in trust matters here.
- Income protectionUsually the first priority for a sole trader.
- Talk to an adviserTell us about any business borrowing as well as the mortgage.