John Yerou, MD from Freelancer Financials explains that income protection can provide a tax free monthly income to protect your current lifestyle if you are unable to work due to illness or injury.
How can I keep the costs to a minimum?
It is important to be realistic about the amount of monthly income you would need to maintain otherwise you will be paying for cover unnecessarily. Whilst you may be able to cut back on some areas, there will be other bills that will be essential and in some cases certain expenses could even increase if you are ill or incapacitated over a long period of time.
You may need changes made to your house or car in order to aid mobility or need to employ a carer. Income protection can offer you the opportunity to cover any of these expenses and it is possible to protect up to 75% of your income. This can allow you the freedom to concentrate on getting back to health and getting on with your life without suffering undue financial hardship.
We have access to a plan that pays out benefits on the very first day of any illness, so covering even short term illness such as a cold or minor sporting injury. An effective way of keeping costs to a minimum is to accept a waiting period before you begin to receive a pay-out.
You can defer payment of benefits if you have savings to fall back on or perhaps have credit cards etc that you could draw upon in the short term. Options for the waiting period of the policy will be one, two, three, six and twelve months and the longer this deferred period is, the cheaper the premium.
What should I look for in a policy?
Many of the policies available via the High Street banks pay out solely on salary and so probably won't be suited to your income as a Freelancer. It is vital that you find an insurance provider that understands your unique circumstances and offers a policy to suit your employment status and lifestyle.
This is one of the areas of financial planning where cost is not necessarily the deciding factor when you choose a provider. It doesn't make financial sense to try and save a little by choosing an insurer that might deter or reduce a claim so it is important to ask for the payment statistics from the insurer.
Dividends and salary
You may also be drawing a low salary but take your contract income via other means (i.e. if outside IR35) so you should also check that dividend income etc is protected. Many providers will shy away from covering against loss of dividends as this is too often deemed to be investment income. This is a vitally important question to ask as there is no point in you paying the premiums if you will be unable to claim.
'Own' not 'Any' Occupation
It is essential for Contractors to ensure that any policy allows you to receive benefit if you are unable to carry out your 'own' occupation as opposed to some lesser policies that will only pay out if you are unable to carry out 'any' occupation.
'Any' occupation means that despite your skill level and current income, an insurer would argue that you are still able to work in a supermarket, stacking shelves and they will therefore stop a claim. This important issue is often overlooked by contractors looking at income protection options and can often mean that a cheaper quote doesn't offer you an effective safety net. 'Own' occupation specifically protects you against being unable to carry out your current, highly skilled and well paid duties.
How long do I need cover for?
You should consider the impact on your life if you were unable to ever return to work. It is important to guard against the impact of an injury or illness, so serious, that you are permanently unable to work and so you should consider a policy that will cover you to your chosen retirement age. Look carefully at the date that your pension is expected to pay out as a state pension may not pay out until as late as 67. You may also incur penalties for taking some of your existing pensions early if you were ill and needed the benefits sooner than anticipated.
The impact that the cost of living can have on your chosen income level can be devastating. When you take out your policy with benefits of £2500 per month for instance, it can be easy to forget that this will be worth a fraction of the amount if you come to claim in ten or twenty year's time. It is therefore essential to inflation proof your policy so that the payment increases at the rate of inflation and will give you the same monthly spending power for the life of your policy.
Some believe that they are invincible and that income protection is an unnecessary expense but for Contractors it is essential. You have no employer safety net to fall back on. If you are willing to insure your car, your home and your belongings, it surely seems sensible to insure the income that is ultimately used to pay for those things. Your ability to work and earn an income is vital to continue your lifestyle and protect your family.
To speak to an adviser at Freelancer Financials about your protection needs, call 0208 421 7999
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