It’s fair to say that owning a small business in the middle of a pandemic has been far from easy. Although many small business owners are optimistic about the future, it is still one of the most financially uncertain careers to have.
While insurance payouts have kept many businesses afloat during these difficult times, it’s important to remember that these policies generally protect the business itself and not the owner.
Imagine you become seriously ill or injured and your income eventually stops as you’re unable to work. In most cases, a small business will not be able to provide statutory sick pay for more than 28 weeks – even if you’re the one who owns the company. How will you make mortgage repayments and look after your family? Income protection could be the answer!
Here’s the full lowdown on why income protection is important for small business owners.
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What Is Income Protection Insurance?
In the event that you become seriously ill or injured, income protection is designed to cover 50-70% of your monthly salary until you are able to return to work. In some cases, income protection will continue to pay out until you retire or pass away, whichever comes first.
Your income is calculated based on your share of the business’ pre-tax profits, as well as any mortgage or loan repayments you may have.
For example, if your salary is £3,000 and you arrange for your income protection policy to cover 70% of your monthly income, you will receive a payout of £21,000 a year. That’s £1,750 a month!
Plus, the good thing about income protection is that, if you pay the premiums yourself, then any payouts are tax-free. Essential, the policy has been taxed already because your income is taxed and you’ve paid the premiums from your net income. That way, covering bills or any additional costs you may incur should be pretty easy.
Alternatively, if you decide to take out income protection as part of your employee benefits package, then you can claim premiums as a business expense on your tax return. Though note that any later payments will be subject to tax.
How Much Is Income Protection Insurance?
The cost of your monthly premiums will largely depend on your job. Let’s face it, some jobs are riskier than others and premiums will reflect the daily risk you face. For example, if you work in construction you will have to pay higher premiums than an office worker. After all, there is a higher chance that you will have an accident or injury and therefore will be more likely to make a claim.
Generally speaking, being a small business owner does not usually involve much manual labour. Daily tasks tend to be managerial and administrative. With this in mind, premiums should be relatively affordable for most small business owners.
Though, note that a myriad of other factors will also determine the cost of insurance, such as your health, smoker status and your desired level of cover.
Is Income Protection Insurance Really Worth It?
Remember, you may be entitled to state benefits if you unexpectedly fall on hard times. However, keep in mind that there are various benefits available and the rules regarding eligibility are constantly changing. Unfortunately, there is no guarantee that your household will qualify for such support. Moreover, you will likely receive less from any state benefit payments than income protection insurance.
Note that income protection payments are considered ‘ unearned income’. This will affect the state benefits you’re entitled to, as the more unearned income you have, the less state benefit you will be able to claim. What matters most is that you choose the option that is best for you and your family.
What Does Income Protection Insurance Cover?
Income protection insurance only covers illnesses and injuries that prevent you from working. Though bear in mind that insurance will pay out for pre-existing conditions and how each insurer determines your ability to work can vary drastically.
Cancer, strokes and heart disease are the most common standard illnesses covered by income protection. However, the range of conditions your policy covers is ultimately decided by you. Though your insurer may charge you an extra fee to include specific illnesses not already listed in the policy details.
Every small business owner hoping to secure their family’s financial future should consider getting income protection insurance.