It could be argued that financial protection is more important for self employed individuals than other employment types. The reason being that usually when employed or similar, you receive an element of financial protection cover through the benefits offered by your employer. When self employed however, it’s all down to you.
So what are your options?
Also know as life insurance, or term insurance. This is where in simple terms you pay a monthly premium and then should you die during the term of the product, a lump sum is paid out to your beneficiaries/loved ones. There are different options available including:
Decreasing Term Insurance – This is where the sum assured (the lump sum payable) reduces over the term of the policy. It’s largely designed to run alongside a repayment mortgage.
Level Term Insurance – Unlike the decreasing term insurance, here the sum assured remains fixed throughout the term of the policy.
Increasing Term Insurance – The third option is where the sum assured increases year on year in line with an index such as RPI. The idea is that the sum assured grows in line with inflation.
This is effectively life insurance but where the policy is paid for through your company. The result is tax savings for both the business and yourself.
Vitality have built an excellent calculator where you can compare the tax savings here.
Similar to life cover in that you pay a monthly premium over a set term in return for receiving a tax free lump sum upon receipt of a succession claim. However rather than the sum assured being payable on death, instead it is on diagnosis of a critical illness. The list of illnesses covered vary from one provider to the next but tend to cover conditions such as heart attacks, strokes, some cancers, liver disease, etc.
Whereas the various types of cover mentioned so far all provide a lump sum payout, income protection offers a monthly pay out. The idea is to cover a percentage of your monthly income if you’re unable to work. The great thing with income protection is that in order to claim you usually simply need to be signed off by a doctor, and it doesn’t matter what your condition is. It could even be something like you’ve damaged your shoulder at the gym and as a result, can’t lift your arm above shoulder height. If you had a job such as a decorator or window cleaner that could prevent you working. With income protection you could put in a claim and then receive a percentage of your monthly income as a payout.
If one of your business partners was to have a tragic accident, their shares would automatically pass to their dependents. This leaves you with either a new stand in business partner, or a messy buy out. Shareholder protection provides a lump sum which can be used to buy out the shares of the deceased partner.
If you’re worried about the importance of certain individuals to the success of your business and revenue, you can take out key person insurance. This pays out a lump sum if the key person dies or is diagnosed with a terminal illness, helping to offset the loss in revenue.
If a business owner dies or suffers a terminal illness, lenders may have the right to demand that any outstanding loans are paid back. These could be difficult to pay off at short notice. Business loan protection pays out a lump sum to cover the loans.