Being self-employed is exciting and opens up a world of opportunities. However, it also comes with its risks. When you go it alone, you don’t have the same financial security as when you are employed. You don’t automatically get a pension, holidays and sickness pay.
There are steps you can take to help protect yourself financially should you need to, meaning that you can focus on growing your business. One of these steps is taking out income protection.
Table of Contents
What is income protection?
Income protection insurance protects your income should you become unable to work due to serious injury or illness. If you made a successful claim for this reason, an income protection policy would pay out a regular proportion of your income. This depends on the amount of cover that you take out but is typically around 50%.
When you are self-employed, it’s often a little trickier to work out your regular salary, but by no means impossible. Your monthly income will be based on your share of the pre-tax profits generated by your business. The amount of cover you’ll need will depend on the size of your mortgage and whether you have taken out any loans to build up the business or not.
This regular portion of your income is designed to keep your life – and business – afloat whilst you are going through difficult times and cannot work. Because after all, when self employed, if you don’t bring in the money then who will? For this reason, income protection should really be factored in as part of your business plan.
Income protection won’t cover you for unemployment, redundancy or anything self-inflicted such as cosmetic surgery or war-related injuries. Basically, if it isn’t a total unforeseen accident, then you probably won’t be covered for it.
As a business owner, you could use an income protection payout for anything you like. It’s arguably most commonly used for:
- Mortgage or rent repayments
- Loan or credit card payments
- Business running costs (website hosting, marketing costs, technology etc)
How does income protection work?
So, you’ve taken out an income protection policy and you find yourself in a position where you need to make a claim. Usually, your policy will not pay out immediately. This is because most policies will include a deferral period. You will decide on the length of this deferral period when you take your policy out.
It could be four weeks, four months, or 12 months. The longer the deferral period, the cheaper your premiums are likely to be. The deferral period is basically a period of time that must pass before your premiums kick in. However long you choose this to be, it’s important that you factor this in as during this time, you may not be earning money and you won’t be receiving payouts. It may be that during this time, you will be receiving Statutory Sick Pay from your employer, or living on a separate chunk of savings that you have put aside.
When you take out your policy, you will also decide if you’d prefer monthly or annual payouts. These payouts are designed to help life ticking over as normal whilst everything potentially feels as if it has been turned upside down. It allows you to keep meeting rent or mortgage payments, bills and debt repayments, and allows you to continue paying your regular living costs.
Is income protection expensive?
The cost of income protection all depends on your individual circumstances. Your insurer will base policy premiums on your:
- Age
- Current health and family history
- Marital status
- Whether you smoke or have previously smoked
- Whether you have any high-risk hobbies i.e. mountain climbing
- The amount of cover you choose
- The deferral period you choose
Broadly speaking, you should be able to get your hands on a policy that suits your budget. But remember, cheaper is not always better. Especially when you have a business to protect.
If you need more information about income protection as a business owner, then it’s always a good idea to speak to a broker. They will usually be able to provide free advice and quotations from the best providers to get you started.
About Carson Derrow
