MOST of the five million people who run their own businesses in the UK are playing what insurer LV= has dubbed “income roulette”, as they are not saving enough to survive a sudden drop in earnings.

A survey for the protection provider found that 41 per cent of those working for themselves do not put any money aside each month and a further 11 per cent save less than £50.

The independent Money Advice Service recommends having savings equivalent to three months’ income, but 33 per cent of LV= respondents admitted they would fail this test of financial resilience.

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Many said they could not afford to save, with monthly bills swallowing the entire income of 62 per cent of the self-employed, compared to a national average of 56 per cent.

Thirty-eight per cent confessed they were struggling with debt and 33 per cent found it difficult to cope with unplanned costs such as home maintenance or car repair bills, compared to a national average of 28 per cent for both scenarios.

Without an employer to provide sick pay, sole traders and small business owners also worry more than employees.

Twenty-eight per cent are concerned about having an accident that prevents them working, against a national average of 21 per cent, and 29 per cent fear falling sick, compared to 24 per cent across all workers.

They have good reason to be anxious. According to industry body the Association of British Insurers (ABI), every year around a million people find themselves unable to work due to a serious illness or injury.

Justin Harper, head of protection policy at LV=, said: “The labour market has changed markedly in recent years, with self-employment continuing to rise.

“But it’s often the case that self-employed people and small business owners lack the safety net of an employer’s benefits, such as sick pay.

“This means they risk having to rely instead on state benefits, which can involve a lengthy application and wait, with no guarantee of any support.”

State benefits for those who cannot work because of sickness or disability are meagre, with employment and support allowance capped at £73.10 for the first 13 weeks, rising to a maximum of just £109.30 thereafter.

Anyone acquiring a severe long-term disability may get an additional £15.75 to £61.85 a week, while those who find it hard to carry out daily tasks or get about could also receive personal independence payments of between £21.80 and £139.75.

Despite their lack of a financial safety net and the low level of state support, only a handful of those working for themselves act to protect their earnings.

Just four per cent of those taking part in the LV= study had income protection cover, compared to a national average of 11 per cent, with more than 42 per cent mistakenly believing their employment status made them ineligible.

Critical illness insurance, which pays a lump sum on diagnosis of a limited range of serious conditions, is more popular.

However, for most people, income protection (IP), which makes a tax-free monthly payment to supplement savings and benefits in the event of accident, illness or unemployment, is a better investment.

Sometimes also known as permanent health insurance, IP covers far more eventualities, can be used to meet all sorts of expenses, and should continue until the policyholder recovers, retires or dies – although cheaper, short-term policies are also available.

The unemployment component is not an option for the self-employed but they are eligible for accident and illness-only policies.

The cost of protection depends on the applicant’s age, the level of cover required and the length of delay before payouts start. Providers will also take into account health and family medical history, and the type of job the applicant does, as some occupations are riskier than others.

To work out how much cover you might want to take, add together your monthly mortgage or rent costs, debt repayments, typical household bills and other regular outgoings then add a sum on top for unexpected expenses.

Because payments are tax-free, the maximum you can generally apply for is around two-thirds of your typical pre-tax earnings.

Policies are available through internet comparison sites or direct from providers, but if you are unsure about your needs, it may be wise to consult a specialist broker or independent adviser.

Mr Harper said: “We recommend self-employed people speak to a professional financial adviser about whether they’d benefit from taking out private insurance, such as an income protection policy.”