How to protect your livelihood as a sole trader

As a sole trader, your business depends on your ability to work, so a day off could result in a loss of income. Even if your business is set up to generate passive income, a long-term absence could impact your ability to promote your work and generate new ideas.

You're already less likely to take sick leave than employed individuals, partly because you're too busy to take time off and partly because of a lack of sick pay. You might also return to work before you're fully recovered for similar reasons.

Investing in business insurance can help you cover your losses and avoid accruing debt when you can't work.

A sole trader needs business insurance to protect their work, including professional indemnity insurance to cover their legal duties to clients. However, when it comes to financial protection, it's a good idea to focus on policies that generate an income. It's also worth considering insurance that offers health benefits, as well as policies that pay a lump sum to provide your family with a financial safety net if you're no longer around.

Let's examine some of the insurance policies that provide you with financial protection as a sole trader.

Income protection insurance

An income protection policy covers you when you can't work due to illness or injury. As a sole trader, you likely won't be entitled to statutory sick pay (SSP) unless you've set up your business so that you're the sole director of a limited company and also the sole employee.

How does income protection insurance work?

Income protection cover pays a monthly income while you're off work. Income protection payments typically last until you return to work or reach retirement age, whichever comes first. When you buy a policy, you can set your intended retirement date. Some insurers offer coverage up to the age of 70. Insurance companies calculate the premium you pay based on the risk you'll claim. The older you are, the greater the risk of ill health and the higher the costs. If you plan to take your pension in your late 50s, it could reduce your insurance premiums.

When buying income protection cover, you'll also need to set a deferral period. Payments don't start immediately when you become ill, so you should consider what financial reserves you have in place and how long you'll be able to cover your regular income if you become ill. The minimum deferral period is usually four weeks, but you can choose a longer period if your circumstances warrant it.

How much will I get paid?

Income protection cover payments are equivalent to a fixed percentage of your usual earnings. You can choose the level of cover when buying the policy, but it's usually between 50% and 70% of your earnings. Payouts on individual policies are based on the assumption that your expenses will be reduced if you're not working.

If you're a sole trader registered with HMRC but you don't have a limited company, you won't be able to claim your insurance premium as a business expense and will need to pay the premium out of your regular income. However, this means that you won't have to pay income tax on your policy payouts.

Critical illness insurance

Critical illness insurance pays a tax-free lump sum if you're diagnosed with an illness listed on the policy. The illnesses that policies cover vary depending on your chosen provider, but typically include cancer, strokes, heart attacks, multiple sclerosis and Parkinson's disease. If you have a family history of a particular illness, it's worth checking the policy to confirm coverage before you invest. There are often other terms and conditions that determine when a policy will pay out.

You can use your payment however you wish, whether you want to pay the bills, fund private rehabilitation or adaptations to your home or leave money for funeral expenses if you're terminally ill.

How does critical illness insurance work?

You can buy critical illness cover as a standalone policy or add it to your life insurance. It's usually more cost-effective to add it to your life insurance than to pay a separate premium. However, your choice depends on your circumstances, so it's a good idea to speak to an insurance broker to discuss your needs before deciding.

Critical illness policies only pay out once. Once you've claimed, the policy will end, and you'll need to decide whether to take out another policy.

Are there different types of critical illness cover?

Critical illness policies provide level and decreasing cover, so you can choose the policy that best meets your needs. If you want to pay off the mortgage when you become ill, a policy with decreasing cover may be suitable, as the amount you owe reduces over time, so your lump-sum payment can decrease to match. Alternatively, you might want to ensure your lump sum remains at the same level whenever you claim, meaning level cover is more suitable.

Some policies allow you to cover your partner or children, or to pay a lump sum if your child is ill and you need to take time off to care for them.

Life insurance

Life cover pays a lump sum to your chosen beneficiaries when you die. While employees often have death-in-service benefits provided by their employers, sole traders don't, so you can provide your own. Some policies pay out if you're diagnosed with a terminal illness, and you can also add critical illness cover, as mentioned. While life insurance won't pay you an income, it can give you peace of mind knowing your loved ones are protected when you're gone.

It's also a good idea to make a will or review your existing one to ensure it covers your business interests, as this can ease the transition.

How does life insurance work?

Life insurance pays a lump sum that's based on a multiple of your usual income. Your insurer will assess your financial eligibility, so you'll likely need to provide details of your pre-tax income and self-assessment tax return when applying.

You can choose who receives the lump sum payment from your life insurance when you buy the policy by completing a nomination form. Ensuring the policy pays into a trust means it goes straight to your loved ones without going through probate and won't be subject to inheritance tax.

Health insurance

Health insurance can help you get back to work more quickly or even avoid time off altogether. Some insurers offer small business health insurance policies to one-person businesses, so you can compare the benefits on offer and decide whether to invest in an individual or small business policy. A broker can help you find the right insurance for your needs.

As a sole trader, you can't put your health insurance through the business as HMRC regards it as a personal benefit rather than being wholly for business purposes. However, if you're an employee of your own limited company, you may be able to pay for it through the business and pay income tax on the value of the benefit. Speak to your accountant for advice on the best approach.

Quick access to treatment

Waiting times for private treatment are typically shorter than those on the NHS. If you need medical treatment as a sole trader, your priority is likely going to be quick access, so you can get back to work without negatively impacting your health. As we've seen, sole traders often return to work before they're fully recovered to prevent financial loss. Combining health insurance with income protection cover helps you recover quickly and avoid a loss of income.

Preventive care

Health insurance typically provides access to health assessments that help you identify areas for improvement and head off health issues before they arise. Some health insurance policies include health assessments as part of their core coverage, while others offer discounts through their member rewards programs. You may also be able to choose between different assessments depending on your needs. Some are basic health checks, while others offer enhanced fitness tests, which could be an advantage if you engage in physical work.

Every insurer has a member rewards program providing treats and discounts. In some cases, you can earn enhanced rewards by setting and achieving healthy living targets, which gives you an extra incentive to look after your health.

Self-help resources

Health insurance typically includes a range of self-help resources you can access based on your needs and preferences. Rewards programs typically include discounts on activity trackers and smoking cessation support, as well as free access to mental health apps. Health insurance also includes health helplines for general advice and access to an employee assistance program, as part of business health insurance policies.

Most insurance companies also have a library of articles on various health topics that you can access even if you aren't a customer.

As a sole trader, your health is one of your main assets, and your income depends on your being able to work, so it’s vital you have the right protection in place. At Globacare, we help you choose policies that fit your needs and budget, giving you peace of mind. Contact us for tailored advice.