Why The Self Employed Need Income Protection
What is your first thought when the monthly bills come in? Probably that they are too high and seem to come round too fast.
But what would your first thought be if you didn’t have the money to pay them?
Bills don’t stop coming if an income does. Illness, unemployment, the loss of a key contract if you run your own business – they all have the potential to cut off your income at any time. Being able to cover everyday expenses without a steady income would be difficult enough, but what about your mortgage payments?
Research by Scottish Widows show that 21% of respondents believe that their household wouldn’t be financially secure if it unexpectedly lost its main income.
Not only are savings pots woefully limited for many, but a large number of households fail to have any form of income protection in place.
You need a backup plan.
Saving for a rainy day
Of course, you might have a lump sum in the bank designed to help if things go wrong. Enough cash to replace an income for six months sounds like a good idea, but in the real world few of us are likely to be able to afford to have that kind of money sitting around. Having a pile of cash in a savings account where it will be steadily losing value to inflation faster than it will be earning interest makes very little sense.
Perhaps you have investments that you could sell. But even if you have sizable assets, spending your savings can only ever be a short term solution – because sooner or later (and probably sooner than you would think) those savings will run out. If you have investments, you will probably need them to provide for your old age, or for that of those you love.
You need a more rational approach to providing your financial safety net. We protect our cars, our homes, our health and even our pets with insurance. It’s just as easy to give yourself and your family insurance protection against financial problems too.
Most of us would agree that life assurance is essential to provide peace of mind for ourselves and financial security for our families. It may seem like an expensive outlay, but while none of us ever want to think about the worst, it does happen, leaving families facing a financial struggle as well as the loss of a loved one. It needn’t cost a fortune, and policies can be tailored to your needs and budget.
Providing life assurance for your dependents is the cornerstone of the financial protection your need. But it there is a great deal more you can, and probably should, do. The statistics show that you are probably much more likely to have a debilitating illness or lose your job than die prematurely – and yet surprisingly few people give themselves the insurance cover they and their dependants would depend on.
Income protection insurance
Income protection is a long-term insurance policy, designed to support you if you can’t work because you’re sick or injured. It can replace part or all of your previous income, depending of the level of cover you choose and can pay out monthly up to your normal retirement age. There may be a waiting period before paying out starts and you can reduce the cost of the insurance by opting for a longer waiting period, which could be worthwhile if you have enough savings to manage on for a short period when you first become ill.
Critical illness cover
Critical illness cover pays out a tax-free lump sum if you are diagnosed with one of the serious illnesses named in the policy, which usually include most forms of cancer, heart attack and stroke. It’s designed to pay off your debts or a mortgage or pay for any adaptations needed to your home – for example, so you can use a wheelchair.
Only named medical conditions are covered by these policies, although some allow you to select the conditions that are covered. Common illnesses that might keep you off work such as back problems and stress are not included.
There are related policies, some of which provide income protection for a limited time, and others that provide tailored cover for a limited number of medical conditions.
To create the financial safety net you need, it makes sense to get professional advice from someone who understands the products available, and can explain how they could help you.
Creating your financial backup plan
Everyone has a different combination of risks, responsibilities and priorities, so everyone needs something different from their financial backup plan. When you need to think about creating yours, contact Clarity to arrange your own financial review, and discuss the protection you need.
The Financial Conduct Authority does not regulate wills, taxation and trust advice.