Self-Employed and Critical Illness: How to Protect Your Income

If you work for yourself, a critical illness doesn't just affect you: it affects your business. While you're in treatment, revenue can fall or stop altogether, but the rent on your premises, suppliers, loans and sometimes payroll keep running. Protecting your income comes down to three things: knowing what the state system would give you, deciding what gap you want insurance to cover, and preparing the business to keep running for a while without you.

We're not going to give you figures for benefits or premiums, because they depend on your circumstances and on each insurer. What we do give you is a method for working out your own figures and a list of questions to review your policies.

Why the self-employed are more exposed

An employee who falls ill still has a company behind them keeping their job open. The self-employed person is both the worker and the business. That has several consequences:

• Your income depends on your presence. In many trades and professions, if you're not there, nothing gets billed: the plumber, the physiotherapist, the consultant, the bar owner behind the counter.
• The business's fixed costs don't stop. Premises, utilities, leasing, loan repayments, business insurance and, if you have staff, their wages.
• Customers don't wait. A long absence can send them to a competitor, and winning them back is costly.
• The state benefit may not be enough. As a self-employed contributor you may be entitled to a temporary incapacity benefit, but the amount depends on your contribution base and on the requirements being met, and it rarely matches what you earn while working. Exactly what you'd be entitled to is something your accountant or Social Security itself can tell you.

Also check with your accountant which obligations and payments keep running while you're off sick, because that's an essential figure for your calculations and it varies depending on your circumstances.

Work out your business's figures

Before talking about insurance, you need to know three figures. Ask your accountant for them if you don't have them to hand:

1. The business's fixed monthly costs. Everything you have to pay whether or not you're billing.
2. Essential personal expenses. What your household needs each month: housing, utilities, food, loans. If you want to work through this in more detail, we have a guide in critical diagnosis and family finances.
3. What you'd receive if you stopped working. The state benefit you'd be entitled to, plus any insurance you already have that would pay out in that situation.

The difference between the first two figures and the third, multiplied by the length of time you might be unable to work, is your gap. That number guides every decision that follows. You don't need to cover it entirely with insurance: part can come from a business savings cushion, part from reorganising the business, and part from a policy.

The pieces of cover worth reviewing

Life insurance with a critical illness advance

Our life insurance for the self-employed includes among its standard covers a critical illness capital advance, alongside death, total permanent disability and double the sum insured for accidental death. For someone self-employed, receiving part of the sum insured at the point of diagnosis can be exactly what keeps the business open during treatment. Remember that, if it's an advance, what's paid out usually reduces the sum your beneficiaries would later receive. What proportion is advanced and under what circumstances depends on each policy. If you'd like to understand the difference between this cover and others, we explain it in what is critical illness insurance.

Accident insurance

Our accident insurance covers the self-employed person around the clock, both at work and outside it, with medical assistance and compensation for death or permanent disability. It's very useful, but be clear about its limit: it only responds if the cause is an accident. An illness, however serious, falls outside it.

Health insurance

Our health insurance for the self-employed gives you access to specialists, diagnostic tests and hospitalisation in the private healthcare system, with or without a co-payment. It doesn't pay income, but it covers the care side.

Daily sick-pay cover

There are policies on the market that pay a daily amount for each day you're off sick, designed specifically for the self-employed. If you're interested, ask how they define being off sick, from which day payment starts, for how long at most, and which illnesses are excluded. These are terms that vary a great deal between insurers and need to be seen in writing.

Long-term care insurance

Our special long-term care insurance for the self-employed pays a lifetime monthly income or a single lump sum if severe or major dependency is recognised, whether it results from an accident or an illness. It protects a more extreme scenario, but it's a piece worth considering in a full plan.

Prepare your business to run without you

Insurance provides the money; the continuity of the business depends on decisions made in advance. Some simple measures:

• Document the essentials. Passwords, suppliers, key customers, processes, payment dates. Make sure someone else could understand it without having to call you.
• Identify a stand-in. An employee, a partner, a trusted colleague or a family member who could handle the essentials for a while.
• Check who can sign. If no one else can operate the accounts or sign on behalf of the business, everything grinds to a halt. Ask your adviser or a notary which arrangement suits you.
• Build a cushion within the business. A fund to cover fixed costs for a while, kept separate from day-to-day cash flow. Our savings insurance for the self-employed is one way to organise the surplus.
• Talk to your key customers. There's no need to give personal details; it's enough to know what they'd need if you had to be away.

A practical case

Think of Carmen, who runs a small shop in La Laguna with one employee. She pays rent on the premises, her employee's wages, her suppliers and her own mortgage. If she received a critical diagnosis and had to stop for a few months, her employee could keep the shop open, but with shorter hours and fewer sales. The state benefit she'd be entitled to wouldn't cover the difference.

Reviewing her policies, Carmen finds that the life insurance linked to her mortgage didn't include the critical illness advance, and that her accident policy wouldn't respond to an illness. With that in mind, she decides on two things: adding critical illness cover to her life insurance, and setting aside part of her annual profit for a business cushion. She also documents orders and payments so her employee can manage them. It's not a perfect plan, but it turns the threat of closure into a manageable problem. The case is an illustrative example; your situation will need its own figures.

Common mistakes among the self-employed

• Thinking accident insurance covers everything. It only covers accidents.
• Relying only on the state benefit without having worked out how much it would be or how long it takes.
• Mixing personal savings with business savings. When the problem arrives, no one knows what's actually available.
• Taking out cover too late. These policies are taken out while you're in good health, and there's usually a waiting period before cover begins.
• Not reviewing policies as the business grows. If you've taken on staff or opened a second location, your needs have changed.

Checklist

1. I know the fixed monthly costs of my business and my household.
2. I've checked with my accountant what benefit I could receive and what obligations would keep running.
3. I know whether my life insurance includes a critical illness advance.
4. I know what my accident insurance does and doesn't cover.
5. I have a separate cushion for the business.
6. Someone could keep the essentials running if I'm not there.

For medical questions, your doctor is the reference point; for tax and employment matters, your accountant. We make sure the insurance fits with everything else.

How we help you at Retuerto y Asociados

We review your personal and business policies with you, work out the gap together, and propose, in writing and comparing several insurers, the pieces that make sense for you. You'll find all the information on the critical illness cover on the critical illness insurance page, and the rest of our solutions at insurance for shops and the self-employed. Ask for a free quote or get in touch via contact.