Self-employed clients provide a huge opportunity for income protection (IP) cover but advisers must ensure they ask the right questions around earnings so they do not over insure their clients, Drewberry director and co-founder Tom Conner has warned.
Conner revealed his top three tips for advising self-employed clients about IP on the fourth day of the Income Protection Task Force’s (IPTF) Income Protection Awareness Week.
First, he explained that setting shorter deferred periods can work out better for self-employed clients – particularly the more financially vulnerable because while they may have savings, they will not have any sick pay.
Second, Conner said that while some mainstream insurers will not accept the risk associated with certain occupations such as tradesmen who tend to be more prone to broken bones or musculoskeletal problems, the friendly societies such as British Friendly, Cirencester Friendly, Holloway Friendly and Shepherds Friendly do cater for self-employed people in these occupations.
And Conner’s final tip was around ensuring advisers ask the right questions around earnings.
“When advising these clients on how much they can insure, often insurers are able to cover up to a certain percentage of income, for employed clients that’s gross income whereas the terminology needs to be different and how you calculate it is different if you’re talking about a sole trader,” Conner explained.
“So, if you go out and you’re earning that revenue, sole traders often have costs involved. It might be building materials or business mileage – that needs to come off the amount which you’re basing the income on.”
Conner gave the example of someone who is earning £30,000 a year, but if they have £5,000 of expenses then the adviser would need to base the cover on the reduced amount of £25,000.
Without doing so this could disrupt any claims which become payable, he warned.
“If you’re not specific and you don’t answer those additional questions around expenses and you insure that client based on the £30,000, you can often over insure them and being over insured is the most common area where claims for self-employed people go wrong,” Conner continued.
“So, what you need to ask for is what their net profit is, or their profit before tax – so their revenue minus their expenses to get down to that figure you base cover on.
“Additionally, with the self-employed, a lot of insurers will base cover on an average of earnings over the last three years. This is because income tends to fluctuate for the self-employed and so when doing that calculation – you just ask for the net profit over the past three years, or you might ask the client if their income fluctuates.
“There is a huge opportunity within the self-employed space – 4.2 million potential clients out there. That’s probably enough to go hundreds of times around all the advisers out there,” Conner concluded.
