Let’s be honest; personal insurance isn’t at the forefront of your mind if you’re self-employed. Running a business is physically and mentally exhausting, even in when you’re not flat-out. Thinking about whether or not your insurance is adequate for your needs is often put on the backburner, where it can be forgotten.
However, if you’ve read this far, the importance of Life, TPD, Trauma and Income Protection insurance (among others) is obviously not lost on you. And nor should it be—being self-employed is different in many respects to working on a salary, one of which is insurance needs. As someone who is self-employed, you’re exposed to a specific range of risks and potential expenses that can be mitigated with proper insurance cover.
Time is money.
So here’s a quick overview of various insurances you may require, a rough guide for use in determining where to focus your research before you purchase an insurance product.
Income Protection insurance
Income Protection insurance is possibly the most important to consider in depth as someone who is self-employed. This cover provides a monthly benefit of up to 75% of your regular monthly income, to replace that cash flow in the event that you are unable to work.
The tricky thing about it for the self-employed is obtaining a level of insurance that reflects your actual income. Basically, there are two types of income protection insurance—indemnity and agreed value. The lower cost of indemnity cover can be tempting, but be aware that to be paid out the full benefit amount under your policy, you must be able to prove at the time of claim that the benefit amount does not exceed 75% of your income. This can be significant for you, being self-employed.
If a bad period for the business precedes your claim, you may only receive a percentage of the benefit to which you thought you would be entitled. For more information, refer to our in-detail articles on income protection insurance and the self-employed; for now, just understand that a careful consideration of the terms of your cover is necessary to ensure it is right for you.
Term Life Insurance is designed to provide a safety net for your family in the event of your premature death. Yes, it’s a morbid topic-but not considering such a situation could leave your family in substantial financial difficulty were the worst to occur, especially if you are the main income provider of the household.
The amount of life cover you require is generally calculated by weighing up your net assets and debts, and then adding on an additional lump sum amount that will provide for cost of living expenses for your family, should they lose a main source of income.
Being self-employed presents extra challenges in determining the amount of term life required. Will your business continue on without you? If so, does it have any debts that need to be paid off? What will the effect of your death be on ownership? Will your family continue to receive income from the ongoing operations of the business? If it will not continue to operate, what will be the proceeds of any assets sold in its liquidation?
Considering these factors is essential in ensuring your family is adequately provided for in the event of your death. It’s a daunting task, no doubt, made more so by the fact that you’re self-employed. Appointing a qualified financial adviser with experience in managing self-employed insurance cover can assist not only in smoothing the process of becoming insured and implementing the right amount of insurance; it can also deliver significant benefits should your family ever need to claim.
Total and Permanent Disability
(TPD) cover provides a lump-sum benefit should you become permanently disabled and unable to work. As in the case of life insurance, being self-employed means further considerations as to how much you will require if this situation were to occur. Relevant considerations with reference to the ongoing operation of your business will ultimately determine much of your need for TPD cover.
Trauma cover provides a lump sum payout should you experience one of a number of specified critical illnesses or injuries, the most common being stroke, heart attack and cancer. For a self-employed business operator, being out of action for a period of time can significantly impact both your immediate income stream and the ongoing profitability of your venture.
A lump sum trauma payment provides breathing space, so that you have the financial freedom to recover fully whilst living expenses are taken care of, or someone is appointed to maintain your business in your stead.
Key Person Insurance
Key Person insurance relates to Life or Total and Permanent Disability Insurance taken out on a key member of your business, under which the business is nominated as beneficiary. In the event of the insured’s death, the business will receive a lump sum payment, much like regular Term Life or TPD insurance.
As a small business owner with staff other than yourself, it is likely that the ongoing operations and success of your business depend heavily on one or more key personnel; founding partners, directors or experts in your operations without whom the venture would struggle to operate. Key personnel who intimately understand the nature and future requirements of your business can be extremely difficult to replace; often they have specialised knowledge or intellectual property, or else perform roles that influence a large part of the company. As such, the loss of a key person-whilst difficult to think about-can be a significant constraint on your business.
Key Person insurance ensures that your business (and therefore your livelihood) can survive until you can replace that key person. The amount required is dependent on your particular business: how much you would need to ensure its survival in a difficult period, and alleviate pressure on short term cash flows whilst you get the company back onto its feet. An adviser can lend a hand in ascertaining exactly how much you might require, and which particular policy would best fit your business.
A Buy/Sell agreement is a legally binding agreement between co-owners that ensures a business has adequate arrangements in place to facilitate the transfer of equity in the event of one owner’s departure due to death, disability, or traumatic illness or injury. Essentially, if you co-own a business, you want to be sure that the company will continue to run if one or more owners is unable to continue to work. Buy/Sell Agreements facilitate the transfer of a person’s ownership share by paying out a lump sum to the owner of the policy (an owner other than the life insured) in the event of death or disability so that she may assume both shares of ownership, and continue run the business.
These insurances ensure that any transfer of ownership required due to death or disability is well-funded, and that the fate of an owner’s stake in the business is predetermined should such an event occur. These agreements cover the following decisions:
Who can buy an owner’s ownership share
What triggers a buyout under the agreement (usually death or disability covered under the policy)
What price will be paid for the partner’s share.
Business Expenses Insurance
Business Expense insurance provides an ongoing monthly benefit for up a period of up to one year to cover the fixed operating costs of the business if the owner is unable to work due to disability. These expenses may include rent, payable interest on debt, employee salaries and insurance premiums—the usual fixed expenses that your business incurs in the course of regular operations.
In the event of your disability, the last thing you need is to be stressed about ongoing business expenses when your health is at stake. Yet to leave your company without cash flow in your absence may result in the loss of customers, the need to take on debt, or even the forced closure of the business without a continued revenue stream. As a self-employed individual, this can potentially have dire consequences for your personal quality of life and the financial security of your family. Business expense insurance protects your personal funds and provides you with peace of mind as you recover, knowing that the fixed costs associated with your enterprise will be paid in full in your absence.
Each of these forms of insurance is usually relegated to second fiddle in the grand scheme of things, as more widely-used products such as Term Life, TPD, Trauma and Income Protection cover take centre stage in people’s minds. However, a small business owner or being self-employed, you’re exposed to unique risks regarding your income and livelihood, and the guaranteed continuation of your business. However, help is afoot. The insurance underdogs described in this article can be tailored to suit the particular risks and financial circumstances of your situation, to ensure that you’re optimally covered in the event of a number of catastrophic events.
For a full assessment of your business’ and your own insurance needs, contact our dedicated team of advisers at Curo Financial Services. As well established experts in the life insurance industry, we have spent years, casting aside products that don’t quite cut it and building strong relationships with senior officials in companies whose insurance products represent some of the best cover out there. If there’s one thing they love, it’s ensuring that you get personally tailored insurance at the best available price. Well, that and writing article after article to educate you about the exciting world that is life insurance.
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