Income Protection is an insurance policy designed to replace a proportion of your monthly income if you're unable to work due to accident or sickness. For this reason, it's also known as Accident & Sickness Cover. The best policies are long-term, providing coverage right up until retirement if you're unfortunate enough to fall so ill that you could never work again.

Unsurprisingly, Income Protection is popular among the self-employed, sole traders and company directors due to a lack of employer-provided sick pay.

In the three months to September 2017, there were a total of 4.8 million self-employed people in the UK - up by 1 million people in 10 years.

For the growing number of people working in this capacity, Income Protection can bridge the gap between your vital outgoings and your income if you suddenly can't earn. It's especially important for new businesses. With limited retained profit, new business owners simply couldn't survive for long if they fell ill.

Personal business

When it comes to Income Protection, those contracting through their limited companies have two options. Firstly, they can choose to own and pay for the policy personally. In this case, as the premiums are paid from post-tax income, the benefit is paid tax free. Alternatively, Directors' Income Protection, also known as Executive Income Protection, is designed specifically for people who work through their own limited companies.

Much like the corporate benefits you might have enjoyed in an employed role, Executive Income Protection is owned and paid for by the business for the benefit of you, the employee. Given this, any benefit is paid back into the business and is taxed depending on how you distribute it from there.

With the company paying the premiums and the ability to insure a higher proportion of your gross income than with personal plans, many company directors prefer their limited company to own and pay for the policy. (Executive Income Protection allows you to insure up to 80% of gross earnings versus around 60% for personal plans.)

Earnings forecast

"While Income Protection is important for new businesses finding their feet, it can be difficult to know how much to insure yourself for," says Victoria Slade, Business Protection Expert at Drewberry. "This is because insurers typically look at your remuneration in the form of salary and dividends over a set period, often three years, and many new business owners simply don't have that data to hand.

"Sometimes insurers will look to annualise any initial income from the business to come up with a figure you're entitled to cover, or potentially even include previous PAYE income if you've recently moved to contracting from an employed role. The nuances in what you can cover can be tricky, so Drewberry always recommends getting advice in this area."

Turning over an uninsurable leaf

"However you measure your income, what's most important is that you insure your earnings and not your company's turnover," warns Victoria. "Your Income Protection policy has to be tied to what you're paying yourself in the way of salary and dividends, not what your company is turning over.

"In the event of a claim, an insurer will look at your earnings as an individual. That means your payout will be based solely on what you've been paying yourself. Insuring your turnover instead could therefore see you being over-insured and paying for a level of cover you'd never receive if the worst happened."