Income protection for self-employed people

An employee who falls ill usually has at least Statutory Sick Pay, and often more. A sole trader or partner has nothing from an employer. If you cannot work, invoices stop going out and income can stop almost at once, while personal bills and some business costs carry on.

That means your savings, or a partner's income, are the only buffer. It is worth working out how many months they would cover your essential personal spending before deciding what cover you need.

The benefit an insurer will allow is a proportion of your earnings, usually between 50% and 65% of gross income. For self-employed people, earnings normally means taxable profit: your turnover less allowable business expenses. For many people that is a much lower figure than turnover.

• •Averaging: many insurers average profit over your most recent years of trading, which can help if you had one weak year but can hold the figure down if profits have recently grown.
• •Evidence: tax calculations such as SA302s, tax year overviews or accounts are the usual proof, commonly at claim and sometimes when you apply.
• •Partnerships: your share of the partnership's profit is usually what counts.

If you have not yet completed a full year of trading, insurers vary widely. Some will look at earnings from your previous employment in the same line of work, some at projected figures, and some will offer a lower benefit until you can show a trading history.

If your income varies a lot, consider basing the benefit on your essential costs rather than your best year's profit. You can review the cover later as your figures settle down.

If you trade through your own limited company, the options are different. Our executive income protection page explains the company-paid alternative, which may suit directors better.

Deferred periods commonly range from 4 to 52 weeks. Without sick pay, the right choice depends on how long your savings would last. A shorter wait costs more; a longer one can make cover much more affordable if you have a cash buffer.

• •A full-term policy can pay until you recover, retire or the policy ends, and costs more
• •A limited payment policy pays for a capped period on each claim, often one, two or five years, at a lower cost
• •Your occupation has a strong effect on price, particularly for manual and skilled trades
• •The definition of incapacity matters: whether you are assessed against your own job or a wider range of work

Our income protection product page sets out these policy features in more detail.

Have your last two or three years of tax calculations or accounts to hand, along with a figure for your essential monthly spending. We can then compare how insurers on our panel would assess your earnings, and recommend a benefit and deferred period that fit your budget.

If you are also thinking about life or critical illness cover, our guide to combining different types of protection shows how they fit together.