Business Owners Not Doing Enough To Protect Income

Posted on July 29, 2020

Self-employment has its benefits, but it also means that the responsibility for providing a financial safety to cover any periods of illness becomes yours alone: there is no Statutory Sick Pay for the self-employed.

In many professions self-employment is fast-becoming the norm, with a new term used to describe many of these arrangements: the ‘gig economy’. Over the past two decades, the number of people who work on a freelance or contract basis has risen sharply. ONS figures reveal a 51% increase in the number of company directors and other small business owners from 3.3 million in 2001 to 5 million in 2019.

Yet surveys show that even though there is a widespread awareness among the self-employed that they are particularly at risk of hardship should they become ill – far too few actually have income protection insurance in place.

The need for income protection insurance is very real

We tend not to think about how we would manage to sustain our lifestyle if we were unable to work through sickness or injury. Yet a 2019 joint study from the government departments for Health & Social Care and for Work & Pensions revealed that in the UK, every year, one in every twenty five people is forced to take a long term sick absence.

Few people have this type of cover in place

With this likelihood of an unwelcome life-changing event, it’s worrying that a recent YouGov survey of 5,144 adults showed that less than 5% of respondents have income protection insurance – even though 23% would not be able to provide a roof over their head for more than a few months if they were unable to work, with 8% of those surveyed not able to support themselves for even one month.

Many people also have debts to repay

And many respondents did not have anything approaching a ‘clean slate’ to help them cope with unexpected financial setbacks: 35% of 18-24 year olds have monthly payments to make on non-mortgage debt, rising to 52% of 25-34 year olds and only falling to 48% among 35-44 year olds.

Clearly there is a disconnect between people’s perceived short-term goals and their far more real long-term priorities.

Expecting help from the State is unwise

The living standard afforded by State benefits continues to worsen. Not only is the value in real terms of support payments ever-dropping, but the numbers of different means of support continues to decrease. A notable recent change (April 2018) meant that people no longer have an entitlement to have interest repayments on their mortgage covered if they are ill and unable to work. Instead, there is a new system of loans in place, and eligibility criteria for these include the receipt of government benefits including Pension Credit, Income Support, Jobseekers’ Allowance, Employment Support Allowance or Universal Credit.

Couples are often no more financially secure than individuals

Being part of a household where there are two incomes might provide very little extra financial security. ONS data from November 2019 put the number of cohabiting couples across the United Kingdom at 16.3 million. If a separate survey carried out by YouGov is representative, then up to 6 million of these are ‘DINO’ (‘Double Income, No Option’) couples: that is, partners living together who need to pool their earnings to live in even moderate comfort.

We’re all familiar with the traditional family image from decades gone by where one adult works and the other keeps house. Today, couples are increasingly unable to live like that, even if they want to. Of over 5,000 people in the YouGov survey, 51% said that both they and their partner worked, 37% stated that this was necessary to get by, 30% indicated that they would both need to keep working until they retired, and 21% revealed that they couldn’t see themselves ever able to stop working.

If your business became inactive, how long could you survive?

The Money Advice Service advocates that those who cannot get by without working keep at least three month’s essential outgoings in an immediately-accessible savings account. If you are not able to rely on such an emergency fund (or even if you can, but would prefer to preserve it for enjoyment rather than for survival) then it’s surely sensible to find the money within your monthly business outgoings to take out insurance that will cover your part of any commitment (individual or shared) to keep a roof over your head and the heat, light and water on. Worryingly, nearly two thirds of those surveyed (59%) did not have this in place.

Income protection for business owners: the need is very real

One 2019 survey of over 1,000 people working on a self-employed basis (company directors, partnerships and sole traders) found that 11% would have to use their long-term savings the instant they were unable to work, and that 30% would run out of money altogether in just one month.

Of those who were forced to take time off because of an injury or illness, 35% had returned work sooner than they would have liked to.

Even though almost half (45%) of these self-employed people identified being unable to work as major risk to their financial security, more than half (55%) did not have any form of insurance cover in place to meet the cost of their basic living needs in the event of an injury or period of sickness.

Income Protection (sometimes shortened to ‘IP Insurance’) aims to fill this earnings gap by providing financial support to cover the loss of income that would result from an injury or illness that left you unable to work, ensuring that you can continue to meet your vital living expenses.

There are many different types of cover available

It is possible to get policies that will protect  you against the financial fallout from physical injury such as broken bones or heart disease, and also mental illness, or health issues brought on by stress. So long as cover remains in place, it is possible to claim whenever illness prevents your business from functioning.

Be sure to check exactly what circumstances you’re insured against

However do be sure that you know exactly what conditions apply: for example, not all policies will pay out if you are no longer able to do your normal job but could find other work. We’ve more details on the exactly how a PIP policy is put together here. Very few IP Insurance policies have any equivalent cash value: if payments stop, cover lapses.

MOST INCOME PROTECTION PLANS HAVE NO CASH VALUE UNLESS A VALID CLAIM IS MADE.

No guarantee can be given that the information provided is accurate in the present or the future. It is not intended to constitute either a statement of applicable law or financial advice, and responsibility cannot be accepted for any subsequent loss following activity or inactivity by any individual or organisation. Indeed, such information should NOT be acted upon without first receiving appropriate and specific professional advice.