Income protection for the self employed
7 Feb 2020
Did you know that 2 out of 5 people in the UK have no more than £1000 in cash savings and 1 in 4 working people have less than £100 left at the end of the month after paying for essentials? Throw being self employed into the mix and you’ve got a whole lot of financial stress and uncertainty.
Imagine you become seriously ill or injured and can’t go out to work anymore. You’re self-employed with a mortgage and a family and you don’t have a significant amount of money in the bank to fall back on. How are you going to pay your bills, run your business and put food on the table?
It sounds scary but there’s no need to panic! Ever heard of a little thing called income protection insurance?
Ok, what is income protection insurance?If you’re self employed then you’ll know that it’s all on you. No sick pay, no maternity leave and no pension. Yes, there’s so many amazing benefits to being self-employed and being your own boss. Hello working from the sofa in your pyjamas and the flexibility to work around your hair appointments. But if you can’t work, the bills still need paying. You may also have bills from your business to pay, such as staff wages, rent and utilities.
Income protection is designed to replace your income if you were to become seriously ill or injured. It usually pays a percentage of your normal salary - usually between 50% and 70% - and the cost of a policy depends on your age, job, your health and lifestyle and the percentage of income you’d like to cover.
During the process of taking out income protection, you’ll agree to the range of illnesses and injuries covered - typically including heart disease, back issues, cancer and more - along with a ‘deferral’ period. This is the period of time between making a claim and when the benefit begins to be paid. The longer the deferral period, the cheaper the premiums.
Ok, how does this work for people who are self employed?If you’re self employed, income protection really should be factored in as part of your business plan so that you and your family can still get by without your income. Afterall, you probably have little to no sick pay and you wholeheartedly rely on the income you make in order to get by.
If you’re self employed and taking out an income protection policy, your monthly income is based on your share of the pre-tax profits generated by your business. The amount of cover that you’ll need depends on the size of your mortgage and whether you have taken out any loans to build up the business.
You may remember that we mentioned the deferral period a little earlier in the article. It’s really important to factor this in. If your deferral period is four months, that’s four months when you’re going to need money to fall back on while you’re not working. We recommend that you have around six months earnings tucked away to tide you over during your deferral period. That way, you’re never going to be without funds to keep things ticking over as normal.
Personal finances, especially when you’re self employed, are not something to be taken lightly. If you’re worried about what life would be like if you were rendered unable to work, give us a call at LifeSearch for fee-free, award-winning advice. We’ll make things a little less scary, we promise. Dial 0800 316 7253 today.
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