Your own boss? Best not get sick

Self-employment: nobody looks after the freelance operator, so he must look hard at insurance cover

Self-Employment brings a great deal of freedom to anyone who is prepared to start a business, but that freedom is not without cost.

Employees of big companies can typically expect pay if they are off sick, normally for six months, a "death in service" payout to their family if they die during their working lives (not just while at work) and a generous pension if they make it to retirement age. The self-employed receive none of this. The simple fact is that if it is your business and if you cannot work, you do not get paid.

And frequently the state does less for people who work for themselves: class 2 (self-employed) national insurance contributions do not entitle claimants to the Job Seeker's Allowance, merely Income Support.

The financial services industry can insure most, if not all, the risks faced by the self-employed, but cover is not cheap. For example, depending on age, policies to cover you against serious illness (called "critical" illness) or permanent disability typically cost between pounds 25 and more than pounds 100 a month. Given such costs it is tempting not to bother.

Having savings can go some way to mitigate the risks, but there can be unforeseen problems. If a sole trader dies or falls ill, for example, it might be difficult to unlock money tied up in the business. In a partnership, there is the added question of keeping the business running, and supporting the surviving partners.

Most self-employed people also have some protection in the form of invoices that they have issued, but have not been paid.

But for anyone with dependants, life insurance should be a priority. Fortunately this is a competitive market. But before you know it you may start to see the logic of other insurance.

"Death and critical illness are the same thing," says John Joseph, a financial adviser, whose firm John Joseph Ltd specialises in ill-health insurance. "If you have a stroke or die, your business is going to go down the pan. Furthermore for most people of working age illness or accidents are more of a threat than death."

Life insurance can be arranged through an existing pension plan, so giving tax relief on the premiums at an individual's highest rate. Cover for accidents or sickness is readily available through brokers and directly from insurers, although it is worth checking the definitions of being unable to work to see if they are appropriate to the self-employed.

Permanent health insurance (PHI) is a popular recommendation of financial advisers. It offers to pay a proportion of an individual's earnings, normally 50 per cent, if they cannot work through ill-health, for as long as they are unable. PHI policies do not always suit the self-employed, however. Most have a delay before they start to pay out of at least a month. The self-employed have overheads, so it is important for the policy to pay out as soon as possible. Usually, policies need a track record of earnings too, which does not help start-up businesses. And some policies will only pay out if you are too ill to do any work of any kind, rather than your normal occupation.

Critical illness insurance is a simpler option, as benefits are based on a lump sum. Generally, critical illness cover is cheaper than PHI, but it is more restrictive. The lump sum would be far less than the total payments from a PHI policy to someone who fell ill early in their working life.

One other area to consider is payment protection insurance for business loans. While payment protection policies for private debts, such as credit cards, will often in effect exclude the self-employed (by only paying out on bankruptcy, for example), business debts can be covered.

q Next week: Mortgages for the self-employed

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