We all know that running your own business can be extremely rewarding. However, that doesn’t mean that being self-employed is without its risks.
As a business owner, your business will often come before you. You most likely have insurance to protect your business, or perhaps a strategy in place to keep your company afloat. But what about you and your family? How would you protect your income if you suddenly fall ill or get injured? The chances are that if you’re self-employed, you will not automatically receive the benefits that come with being employed, such as a pension, holidays, or sick pay.
But personal protection should not be an afterthought. Taking out income protection is simply about protecting your financial future. That’s got to be worth a second thought!
So, what is income protection and why is it so important for business owners?
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What is income protection?
Imagine: you become seriously ill or injured and are unable to work as a result. How would you keep life ticking over as normal and pay your outgoing expenses? Income protection is designed to pay out a regular proportion of your income. It’s possible to cover up to 80% of your earnings. However, most policies usually cover between 50-70% of a person’s income. This is because the more of your income that you protect, the higher your monthly premiums will be.
It’s not always easy to work out how much you earn, especially as a business owner. But your regular income is based on your share of the business’ profits generated before tax. It’s equally important to take into account the size of your mortgage and any loans you need to pay when deciding the level of cover you need. That way, you can focus on recovery, as opposed to worrying about how you will cover bills and other expenses.
Plus, some income protection policies will continue to payout until you either retire or pass away, whichever comes first. You can use your payout however you desire. But as a business owner, it will most likely be useful for:
- Mortgage repayments
- Rent payments
- Loan payments
- Credit card payments
- Business running costs
When is income protection not useful?
Believe it or not, according to the Association of British Insurers, a third of workers who spend six months or more away from work due to illness or injury continue to be off from work five years later. With this in mind, the need for income protection is much greater than most of us let on.
Having said that, income protection is not always useful in every situation. For example, if you have an employee benefits package that includes sick pay for 12 months or more, then it may not be necessary to get income protection insurance. Similarly, if you have sufficient savings that could cover your expenses until you get back on your feet, you may not have a need for income protection insurance either.
Remember, income protection will not cover you if you get fired or if you are made redundant. Likewise, it will not cover conditions that are self-inflicted such as cosmetic surgery or war-related injuries. Essentially, income protection will only cover injuries that are the result of an unforeseen event.
How long does it take for income protection to payout?
When you make a claim, you may have to wait a while before you receive a payout, as most policies don’t pay out immediately. Usually, your policy will include a deferral period, a period of time that must pass before you start to receive any benefits from your claim. This is because, in most cases, you won’t need your payout straight away. You get to decide how long this period is when you take out your policy. It could be anywhere between a month and a year. Unsurprisingly, the longer your deferral period is, the cheaper your premiums will be.
Remember to factor in savings and potential sick pay when you set your deferral period. It’s important to be realistic about how long this will keep your family afloat whilst you’re recovering and not earning money.
You can either receive monthly or annual payouts. That said, it can be tricky to manage a large lump sum of money. For this reason, many people choose to receive monthly payouts. That way, you can continue to pay your regular living expenses, as well as your mortgage or rent payments.
Is income protection expensive?
Generally speaking, the cost of income protection will largely depend on your job. This is simply because some jobs are riskier than others. If your profession involves daily risk, then your premiums will need to reflect this.
However, the cost of monthly premiums will also depend on:
- How old you are
- Your medical history
- Whether you’re married
- Whether you smoke or have a history of smoking
- Whether you are regularly involved in high-risk activities, such as mountain climbing
- The amount of cover you need
- The deferral period you set
As a business owner, it should be relatively easy to find an affordable policy, as, generally, most of your day-to-day activities are administrative or managerial.
If you’re still unsure about whether income protection is right for you, it’s worth speaking to an experienced protection adviser. They will answer any questions you may have and provide you with advice. They can also help you find quotations from the best providers to get you started.