Fit for work?

Ima Jackson-Obot

features writer for FTAdviser and Financial Adviser

Self-employed workers may not believe they need protection but may leave themselves financially vulnerable should they be unable to work for any period. What type of protection products are most beneficial?

There is still some confusion among self-employed individuals over whether they are eligible for protection.

The 2018 Drewberry Protection Insurance Survey found that almost a fifth of self-employed adults did not have any kind of protection cover because they thought they would not be eligible.

But Tom Conner, director of Drewberry Insurance, says the main products on the market for income protection (IP), life insurance and critical illness (CI) cover are all suitable for the self-employed.

And to stand out in the market, many providers have introduced additional benefits to run alongside their policies.

Mr Conner says: “Some of these can be particularly beneficial for self-employed workers, such as fracture cover, which pays out a cash lump sum in the event of a selected fracture, and hospitalisation benefit, which pays out a benefit for each night you have to spend in hospital over and above a set number of days.”

Back-up plan

Self-employed workers are not entitled to statutory sick pay and therefore must pursue a claim for Employment and Support Allowance (ESA), which is not a simple claims process.

The Department for Work and Pensions (DWP) statistics show that between the period of October 2013 and December 2017, 3.7 million people in the UK registered a claim for ESA.

Vincent O’Connor, senior business development manager, protection at Royal London points out that only 60 per cent (2.2 million) of these people managed to complete the assessment during this period of time.

From this group, 38 per cent of ESA applicants were found fit for work and were denied any ESA state benefit payment.

Mr O’Connor adds: “Some of these applicants would have recovered from their illness or injury, but many would have been found ‘fit for work’ simply due to the fact that the work capability assessment is a much wider test to see whether the claimant can do any work – not just their own job.”

“Half (52 per cent) of ESA applicants who were successful in their claim were put in the ‘ESA Support Group’, which means they are suffering from serious medical conditions.

“Being placed in the ESA Support Group essentially means they are not expected to ever work again. It’s vital that the self-employed think about having a back-up plan as the state doesn’t provide enough support.”

Self-employed people must carefully consider their IP needs. — Paul Yates, iPipeline

According to protection experts, self-employed individuals should focus on getting IP, because if they are unable to work due to ill health, the money stops coming in.

Paul Yates, product strategy director at iPipeline explains: “Self-employed people must carefully consider their IP needs. If they suffer an illness or injury they will not receive sick pay and may have to rely on the vagaries of state benefits.”

The next thing self-employed individuals need to consider is CI cover. If they are diagnosed with a critical illness covered by the insurer, at the severity definition they set, they can get a lump sum payment.

Kathryn Knowles, managing director of Cura Financial Services, says: “For the self-employed this could be used to pay for equipment or other adaptations to their work structure/environment, so that they can return to work more quickly.

“If someone has dependents, then there could be additional need for life insurance, but there are a few extra details that would be needed to see if that is the case.”

Putting up barriers

Another barrier to people taking out protection cover is that a vast majority of people do not think they will ever need it.

“But the fact of the matter is that these things do happen to people, and there is a limit to what the state will provide,” Ms Knowles stresses.

In its survey Drewberry Insurance also asked young self-employed workers how they would cope financially if they were out of work for six months or more.

Nearly one in four said they would have to turn to credit cards to make ends meet.

Self-employed individuals are many never have been part of an employer benefit schemes, and are therefore sometimes unaware of the importance of protection cover.

If they rent, they are more likely to be outside of the protection nudge that they might receive during the mortgage process.

Flexible demands

But Mr Yates says product provision has improved.

He adds: “The self-employed need flexibility with their cover, especially for those working in the short-term ‘gig’ economy. With a business starting out, their cover needs may be different to when their business is more established.”

“What people want are products that pay out rapidly with short deferment periods, to cover them during difficult times. They do not want to spend weeks proving they cannot work.”

There are definitely restrictions for self-employed people, but… there are some non-financially underwritten IP plans and deferments available from as little as one day. — Kathryn Knowles, Cura Financial Services

Mr O’Connor says recent product developments have made IP very affordable because it can be tailored around the most important needs of the client.

Historically, many IP claims spanned a number of years, meaning that the amount paid out by life companies is significant. This is reflected in the cost of the insurance policy.

He adds: “A modern innovation is to cap the number of years a claim can be made for. So instead of paying a replacement income until retirement, which could be many years, the replacement income could be paid for a maximum of one or two years. This brings the cost down significantly (typically around 50 per cent to 60 per cent) for the applicant.”

Although there are a variety of options, there are still some restrictions.

Ms Knowles adds: “Unemployment cover is quite limited for self-employed individuals. It is available, but the claims definitions make it virtually impossible to be claimed on.

“There are definitely restrictions for self-employed people, but at the same point there are some non-financially underwritten IP plans and deferments available from as little as one day. However, there is room for more options, especially in the IP market.”

Ima Jackson-Obot is a features writer for FTAdviser and Financial Adviser

Published 02/10/2018


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