Self-employment can be extremely rewarding. You can take charge of your earnings, working hours and location, and there are no limits to what you can achieve.
But being self-employed comes with risks. There is no safety net if you are unable to work because of illness, and no provision for your family if you die while on the job.
You need to factor these risks into your business plan. While you may be able to earn more from your own business, you will miss out on benefits that usually come as standard in an employed role. The key is to set your prices accordingly so that you can cover your costs, maintain your lifestyle and offset some of the risks.
Many of these risks can be insured against. Additionally, paying premiums through the business is often cost-effective.
This guide covers the main areas of financial protection you should consider as a sole trader or self-employed contractor. If you have a larger business with employees, it may be worth considering a group scheme to provide protection for yourself and your staff.
Life cover pays out a lump sum if you die. Anyone can apply for life cover, but it is particularly important for self-employed workers who are not eligible for death in service benefits.
You can select any of the following options within your life cover:
- The sum assured, or benefit amount.
- Whether this should increase, reduce, or stay the same.
- The premiums can either be guaranteed or reviewable.
- You can choose a flexible term which may be anything from five years to whole of life.
- Couples can take out joint cover, which may pay out either on first or second death.
- The plan can be placed in trust so that it doesn’t incur Inheritance Tax if applicable.
Self-employed people and business owners have the following options when setting up life cover:
You can buy a policy directly from an insurance company. You would pay the premiums from your personal account, and any benefits would be paid out, free of tax, to your beneficiaries or into a trust.
The premiums are paid out of your net income, so there are no particular tax advantages to setting up a personal policy. However, they can be more flexible than business contracts and allow you to add, for example, a second life assured or critical illness cover.
Key Person and Shareholder Protection Cover
Key person and Shareholder cover is also set up by the business, but any payout would go to the company or its shareholders, respectively. The purpose of key person cover is to provide the company with liquidity and therefore help mitigate any financial losses for the business in the event of an important member of the team suffering premature death. The purpose of shareholder protection is usually to allow the other shareholders to buy shares from the deceased person’s family or estate.
A critical illness plan pays out a lump sum if you are diagnosed with a critical illness. Most insurers cover a similar range of conditions but there may be some variation in the type and severity.
A critical illness plan can offer the following benefits if you are self-employed:
- It can cover loss of earnings for a short period while you seek treatment
- It can fund any required adjustments to your home or the purchase of equipment
- It can pay for private medical treatment or assistance at home
Income protection provides a regular income to replace your earnings if you are unable to work for health reasons. It is designed to cover longer-term conditions which may not qualify for a critical illness payout. This can be extremely valuable if you are not eligible for sick pay and do not want to rely on State benefits, which are often not enough.
Some of the options that can be included in an income protection plan are:
- A deferred period of between one month and one year
- Level or increasing cover
- A flexible term, which will normally be until you plan to retire. Short term policies are also available and would pay out benefits for up to five years.
Ideally, the plan should be set up on an ‘own occupation’ basis, which means that if you can’t work in your chosen field, the policy would pay out, even if you could still work in a less demanding role.
Plan benefits will normally be reduced if you receive any other income during the claim period.
Private Medical Insurance
If you are self-employed and need medical treatment, your livelihood may depend on you getting back on your feet as quickly as possible. While the NHS is essential for urgent and life-saving treatment, the waiting times for non-emergency care may be unacceptable, particularly if your condition affects your ability to work.
Private medical treatment could be the answer. This can be paid for personally or by the business (although it will be considered a taxable benefit) and can give you more choice and flexibility over your care.
You will normally need to pay a contribution (or ‘excess’) towards your treatment. The higher the excess, the lower the premiums.
Private medical insurance does not cover emergency care or chronic conditions. Pre-existing conditions are normally excluded.
Invest in your own financial security
As well as obtaining insurance, there are other steps you can take to improve your financial security:
- Make sure you have an emergency fund to cover unexpected bills or periods where you cannot work.
- Take care of your health, including diet, exercise, sleep, and avoiding excessive stress.
- Invest in training or expanding your services so that your business remains in demand.
The best protection strategy for you will depend on your circumstances, requirements, and budget. Your premiums will depend on your medical history and lifestyle, so it’s essential that you complete the health questionnaires fully and accurately.
Where does your financial adviser come in to all of this?
At Osborne Financial, life insurance is a key part of our financial planning, no good financial plan is made without the correct protection for your hard-earnt money and financial assets. It is important when thinking of taking out such plans, that you are not only taking out the correct type of cover for your personal circumstances but an appropriate amount of insurance.
We take a fully holistic and thorough approach with reference to life insurance, taking a look at your personal and financial circumstances and put together a plan of action. We take all of the complication away, putting high quality life insurance plans in place where required and read all of the fine print for you.
The information provided on the pages, blogs and articles contained within this website are solely for information purposes only and do not constitute financial advice. Professional advice should always be sought from a financial adviser.