It has never been easy to be a small business owner, especially not in the middle of a pandemic. While owning a small business comes with lots of freedom and flexibility, the past year has proven that it is one of the most financially fragile careers to have now more than ever.
In the US alone, the number of active business owners declined by 22% between February 2020 and April 2020.Insurance payouts have been one of the few things keeping many businesses afloat. However, though these policies protect businesses, they do not always cover owners.
Consider the following scenario- you’re unable to work due to serious illness or injury and your income eventually stops. Most small businesses will not be able to provide statutory sick pay for a prolonged period- even if you’re the owner. How will you pay your bills and take care of your family? Income protection insurance is a good option and can help you secure your financial future in the event of prolonged illness or injury.
Let’s discuss the ins and outs of income protection and why it may be a good choice for you.
In the event that serious injury or illness prevents you from working for a prolonged period of time, income protection insurance will cover your expenses until you are able to return to work or, in some cases, until you retire or pass away.
Insurers typically issue payouts between fifty and seventy percent of your income. This is calculated based on a business owner’s share of their business’ pre-tax profits. Any mortgage or loan payments may also influence the amount of cover you receive, but this can be discussed with your provider. Shorter policies can also be taken out if you wish.
Let’s say the average salary for a small business owner in the UK is around £30,000. If you arrange for your income protection policy to cover 70% of your income, you will receive a payout of £21,000 a year. While 70% is typically the norm for the upper threshold, insurers are flexible. You may be able to come to an agreement where you receive a higher percentage payout on a portion of your income and then a lower payout on the rest.
Payments from income protection insurance are exempt from income tax. This means that you can easily manage your payout to cover bills or any additional costs you may incur.
The cost of your insurance largely depends on the type of job you have. Those with riskier jobs, such as mechanics and construction workers typically have to pay higher premiums. This is because such workers are more likely to become seriously injured or ill. Hence, they are more likely to make a claim.
The role of a small business owner does not usually involve manual labour, and duties are mostly managerial and administrative. This means that most small business owners would be in class one and pay lower premiums. Nonetheless, this can vary depending on what industry you are in or the responsibilities you take on.
So the cost of income protection for small business owners is relatively cheap compared to that of other professions. Though, note that your general health and wellbeing, and whether or not you smoke also affect premiums. Not only that, but how much cover you feel you need will also determine the cost of income protection.
State benefits are always available as an option if you ever unexpectedly fall on hard times.There are several different benefits available out there and the rules are constantly changing. So you can never be certain that your household will qualify for such support. Moreover, state benefit payments are generally a lot less than what you will receive from income protection insurance.
It is also worth noting that if you do take out income protection, this will impact the state benefits you’re entitled to. Income protection payments are referred to as‘ unearned income’. The more unearned income received, the less state benefit you are able to claim.
Therefore, it’s important to consider how income protection insurance can affect the other options of financial support available to you and your family.
Income protection insurance will not always make payments for conditions you were aware of prior to taking out your policy. Furthermore, it only covers conditions and injuries that prevent you from working. How each insurer determines your ability to work varies.
The most common illnesses and conditions covered by income protection policies are cancer, strokes and heart disease. However, standard illnesses included in policies differ between insurers. But the illnesses included in your policy are ultimately determined by you. For an extra fee, insurers will often allow you to include specific illnesses not or already included, and can even include your children on your policy.
All small business owners should consider income protection insurance as a way of guaranteeing your income if you are ever out of work.
Written by Sophie Turton.