subject: Self Employment And Income Protection Insurance Explained [print this page] Those of us who are self-employed understand that in addition to all the benefits - such as freedom, control, self-determination and wearing your PJs to work occasionally - there are also some unexpected drawbacks! One of the infrequent, but not insignificant drawbacks is the effort it takes to obtain financial services. Tax is more difficult, getting a loan can be near impossible, and insurance policies also tend to be more involved. However, income protection insurance is more essential for the self-employed than any other income-earning group, so today we help demystify it.
The Basics
Most of the advice that exists about income protection insurance for ordinary employees also applies to the self-employed. For example:
The maximum cover level is still set at 75% of your regular income
You will need to select a waiting period
You still need to choose between stepped and level premiums
You'll still need to decide whether an agreed value policy or an indemnity policy will work best for you
Agreed Value or Indemnity Policy?
The choice between agreed value and indemnity policies is more critical with income protection insurance for the self-employed. In short, your best choice will be determined by your particular circumstances. So, if:
Your income varies wildly from month to month: Go with an agreed value policy; if an accident occurs in a down time you could be left with no payout.
Your income is fairly stable: An indemnity policy is cheaper, and if you can rely on your income to remain steady you can rely on the policy to pay out a reasonable amount. If you want extra peace of mind, though, it would also be reasonable to choose an agreed value.
You expect your income to rise: You should consider an indemnity policy; they are cheaper initially and with your income only on the up it means there is less possibility of you earning less than your sum insured.
Basic Income Protection or Business Expenses Cover?
Many income protection insurers offer an additional option for self-employed people - it may be called 'Business Overheads Cover' or Business Expenses Cover.
This option will be important for those who have mortgaged an office, or who have high additional fixed overheads that will be incurred even if you arent working. However, in most policies the business overheads are an additional benefit the policy may cover.
A Business Expenses Insurance benefit is specifically designed for self-employed individuals (employed full-time) who need to ensure that the fixed expenses of their business or practice will still be paid even if they cannot work due to injury or sickness. The benefit covers business expenses less any amounts reimbursed from elsewhere. You can purchase this cover on its own or together with an income protection insurance policy.
Business Expenses Insurance generally covers things like accounting fees, rent & property taxes, leasing costs of plant and equipment, salaries and associated costs, utilities and phone costs. It does not cover salaries or bonuses paid to yourself, capital costs, real estate depreciation, investment losses, or repayment of principal of any loan or other finance agreement.
by: Hilary Briss
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