Freelancing and income protection plan

24 AUGUST 2023

As a freelancer or a self-employed person, you know that there are more concerns with regards to your financial situation compared to salaried employees. Your income stands to lose much more when you fall ill and cannot work. Income Protection Plans help provide a solution for this.Smiling woman in a city, looking through a window with her smartphone in her handFreelancers and self-employed people don’t benefit from unemployment or paid sick leave like those that are employed, professionals. They take sole responsibility for their own business function and thus can’t receive an income when they fall ill or can’t continue with day-to-day business activities. To provide some insurance against these circumstances, freelancers are encouraged to take out an income protection plan.

What is income protection insurance?

Income Protection Insurance is insurance that pays out if you can’t work because of illness or disability. It has a deferred period of time before your payments start after you have claimed and the longer you wait before receiving them, the lower premiums you receive will be. The shorter your waiting period, the more expensive your cover will be, which means that the risk is higher to the insurer.

Income protection insurance covers most illnesses that can leave you unable to work, depending on the finer agreements of the policy and the level of cover you have chosen. When you are under an income protection plan, you can claim whenever you need to as long as you keep up with your monthly premiums.

How much is normally covered and how long am I covered for?

You are paid out according to the level of cover you have taken out, based on a percentage of your income. This percentage is typically between 50%-75% but can also be increased to a full 100% with top-up benefit structures. It provides a regular income until you are able to work again, until you die, retire, or come to the end of your policy term. If you chose a longer deferred period to benefit from cheaper monthly premiums, be sure that you’ll be able to cover your expenses while you wait to receive the claim amount.

There are three levels of cover that you need to be aware of;

  • Own occupation cover: Which covers you if you are unable to work under your own occupation.
  • Suited occupation: Catered to you if you are unable to do your own job, or a similar one that with your qualifications.
  • Any occupation: Covers your income if you can’t work at all.

How is your income calculated?

At the time you take out Income protection insurance, it is based on your income at the time. When you claim for the first time, however, the amount that is paid out is based on your income at the time you have fallen ill or injured. This only happens if your initial income that was insured is equal to or higher than what you are earning when you are sick.

For example, if you were insured and paying premiums based on an R30 000 income every month, and the year before you claimed you were earning less than that, you will only receive a payout based on what you were earning before you claimed in the last 12 months. This is important to remember when you are wanting to start your own business after working as an employee. If you claim when you are a freelancer, you will only be paid an income based on your most recent earnings and not what you were earning as a salaried employee.

Different types of income protection plans

The three main types of income protection insurance are;

1. Accident and Sickness cover

This is the standard cover that protects you if you are unable to work because of an accident or an illness. It provides freelancers and self-employed persons with the same type of cover as a salaried employee’s sick pay. This type of cover is typically short term, generally paying out in 12 months.

2. Unemployment only

Unemployment income protection covers employees by paying a monthly income if they become unemployed under different circumstances other than health, like retrenchment.

3. Accident, Sickness, and Unemployment

This type of income insurance covers both sickness and unemployment, providing maximum coverage. However, as it covers unemployment, this cover is not ideal for freelancers or the self-employed.

Important to consider

Income protection plans are varied in terms of structure, length of payout, income amount, coverage circumstances, etc. It is highly important to discuss with a financial advisor or do your own research about the type and substance of the insurance plan you need to take out as a freelancer or self-employed person.