As a contractor or freelancer, you must be ready for everything, including the unexpected – even if you don’t believe bad things can happen. As we’ve seen from the pandemic, circumstances can change at any moment, so it’s crucial you do your best to safeguard your business and livelihood.
This can include taking out income protection insurance. In this article, we’re taking a look at the benefits of buying this policy and how it can help you with rental costs, business fees and mortgage payments, for example.
What is Income Protection?
In short, self-employed income protection insurance for contractors is a policy that keeps your venture safe against disruptions and issues caused by certain pre-insured events.
For example, if you find yourself unable to work all of a sudden, perhaps due to an injury or an illness, you may also be unable to pay things like rent and bills. This can lead to permanent business closure.
Income interruption provides you with a specific amount every month that ensures these outgoings are still getting paid, so that you can re-open at a later date instead of worrying about having to close your company.
How Does Income Protection Work?
When you buy this policy, you can more easily go about your day-to-day without worrying about how you’re going to pay the bills if something happens.
The policy replaces part of your income by providing you with regular payments if you can’t work, both in the short-term and long-term, and you can usually claim it as many times as you need it while the cover is still in place.
While income protection insurance may not replace your entire income, it still covers about 50% to 70% (or more, depending on the policy you get), which can make all the difference when you have bills to pay. Generally, your monthly premiums should stay the same throughout the duration of the policy, so you don’t need to worry about rising costs.
If you’d like to learn more about this particular insurance policy, why not call us on 0330 107 9676 and we’ll answer all your questions?
Why is Income Protection so Important When You’re Self-Employed?
If you’re in full-time employment and the business shuts down temporarily, you’d probably worry about whether you’d still have a job and if you should start looking for something else. But, as employees, people don’t have to consider the business’ bills or rent, for example, which isn’t the case with self-employment.
As contractor accountants, we understand that self-employed individuals are responsible for every little thing in their business, which includes paying their own salaries, making pension contributions, paying the mortgage of the building they’re operating from, paying the electricity bills, and so much more. This means that, should the business close temporarily, they’d be at risk of losing everything. But we can help with this!
Income protection is critical for those who own a business or company because it can help them stay afloat in the event something happens, such as an illness or an accident. This is a long-term policy that provides you with regular income to tie you over while you need it so that you don’t have to close down forever.
So, with an income protection cover in place, you can cover your monthly outgoings until you’re able to return to work or retire.
Which Situations Benefit from Income Protection?
There are many insurance policies out there to cover a thousand and one potential problems, such as professional indemnity and public liability. Still, they won’t cover the loss of your income, which can leave you in a tricky situation.
Income protection, in particular, is critical for when you can’t work due to:
- Becoming sick, especially for a prolonged period of time.
- Having an accident that leaves you in hospital or has a long period of recovery, for example.
- Getting a stress-related illness
- Developing a mental illness
Of course, every situation is unique, so it’s important to discuss your needs with the provider so that you can relax, knowing there’s a plan in place if you’re away from your business. It’s important to note that this insurance policy doesn’t exist to cover unemployment or redundancy.
You can also greatly benefit from income protection if you don’t have a lot of savings or don’t want to dip into your pot. Being without an income is scary, and so is using up all the money you saved for months and years. And you may have other plans for your savings as well – perhaps you want to put down a deposit for a house or have been planning to take the whole family on holiday?
To prevent you from having to deplete your savings account to pay your salary or your business’ utility bills, consider income protection to ensure your lifestyle remains the same and is as unaffected as possible by a sudden illness or an accident.
Do You Know How Much You Need?
This is something to consider as well. How much you require to keep your business afloat depends on several factors, including your individual circumstances, so keep them in mind when purchasing a cover.
For instance, you’ll want to take into account:
- The cost of your rent or mortgage
- Your living costs
- Any debts you may have
- Utility bills and other expenses
- The income you need to live comfortably
- The period of time you can live with just your savings
- How long the policy should last for
By doing this, you can better calculate how much the monthly payments should be in case you need to claim on your income protection policy.
This is important because it means you’ll only be paying exactly what you need. Fall too short, and you may find that you need more money to live comfortably than the one negotiated with the insurer – ask too much, and you may be paying higher premiums than you should.
What Impacts the Cost of Income Protection?
The cost of your premiums will depend on the provider and the cover you take out, as well as on other factors, such as your age, since older individuals may have to pay more (due to the possibility of getting ill more often).
You may be paying less if you’re in good health and don’t have a risky job – just like with other policies, the more hazardous a job is, the more expensive it is to get insurance. Your lifestyle, such as the fact that you smoke, for instance, may also affect your premiums.
The longer the deferred period is (the waiting period before you start receiving payments), the cheaper the monthly fees will be. You can negotiate this period with the insurer so, if you’d like to receive payments immediately after you stop working, you’ll pay higher premiums.
As you can see, several things affect this cost, so speak to us if you’d like more information.
Gorilla Accounting and Roots Mortgages
As sole trader accountants and limited company accountants, we’ve partnered with companies that are the best at what they do, and which offer self-employed individuals outstanding contractor mortgages solutions, contractors’ insurance, financial planning, and more.
Roots are one such company. They make sure you have the right policy for your needs, which means coverage that can meet your exact needs – and gives you peace of mind to run your business without worrying about the worst that could happen.
You’re also only paying for what you need, since the company provides you with protection policies tailored to your requirements and demands.
As our client, you can benefit from our partnerships today, so get in touch with us to learn more about income protection and why you should purchase a cover that isn’t off-the-shelf.
