Entrepreneurs in many ways are very different to the rest of the population. We not only form exciting business ideas, but we act upon them, putting ourselves out there and often taking a financial risk.
Whilst these risks can reap amazing rewards it is vitally important entrepreneurs have some form of financial protection in place, especially if you have children who rely on you.
Many ambitious entrepreneurs are registered as self-employed. Whilst this can bring a greater level of freedom and responsibility, it can also leave you and your loved ones very vulnerable if anything were to happen to you.
In fact, at present life has rarely felt so fragile as a result of the devastating impact of the global Coronavirus pandemic. The effects of this virus have been felt particularly badly here in the UK.
When working for a business, employees often enjoy the added protection provided through their employment, such as death in service. This is usually a x3 or x4 multiple of an annual salary, paid to your loved ones should anything happen to you.
They will most likely also benefit from sick pay if unable to work. Unfortunately, as a self-employed risk taker you do not benefit from this protection, meaning cover is even more imperative. We asked Hampshire based life insurance broker Reassured to run through the available policy options, ensuring we never leave our family financially exposed.
The most obvious form of cover would be life insurance. You pay a fixed premium each month and your beneficiaries receive a lump sum payout if you were to pass away during the policy term.
As a general rule, the younger you are when you take out life insurance, the cheaper the monthly premiums. As a result, it can pay to be proactive and take out a policy when you are in your 20s or 30s, locking in very low premiums for an extended term (up to 40 years).
As your life situation changes, getting married, having children etc, your cover remains in place. Why might you need life insurance?
- To cover a mortgage debt and ensure your loved ones would not have to leave the family home should anything happen to you
- To cover future family living costs and replace a lost income
- Meet expensive childcare costs if your partner needed to remain/return to work
- Cover spiralling funeral costs, which now totals £4,417 according to research from insurer SunLife
There are different policy types to choose from, all varying in cost;
- Level term – To have a set cover amount and term length. If you pass away during the policy term your loved ones receive a fixed payout. Good for covering an interest-only mortgage, where the capital borrowed remains fixed
- Decreasing term – Your cover amount reduces over the course of the policy term. Ideal for covering a repayment mortgage; as what you owe reduces, so does your cover amount. This is usually the cheapest form of cover
- Whole of life – Here there is no set term and you pay premiums for as long as you live. Because no one knows how long we are going live this may or may not be a good option. The main benefit is a payout is guaranteed, (unlike term-based cover like level and decreasing term)
- Joint life insurance – There is the option of taking out a joint policy, which can save you up to 30% on your premium cost. However, a joint policy will only ever payout once (on the first death) before the policy expires, leaving the surviving partner unprotected
Another good option for self-employed entrepreneurs is income protection cover. Instead of paying out a cash lump sum, income protection provides a regular payment whilst you are still alive and ensures your family do not experience significant financial strain if you are unable to work due to illness or injury.
As with life insurance you pay a monthly premium to benefit from this protection. Stop paying your premiums and you cover ceases. Obviously if you are self-employed you will not benefit from any sick pay from an employer, so income protection can be an effective way of replacing your salary.
Family income benefit
Family income benefit is a far less well-known policy option, but one which could be ideal if you are self-employed. FIB is term based, so you enjoy cover protection for a specified period of time.
However instead of paying out a single lump sum, it provides ongoing tax-free monthly payments for the remainder of the term should you no longer be around. This option is usually very cost effective as the risk to the insurer reduces over time.
For example, if you were to pass away 10 years into a 20-year term, the insurer would be obligated to make monthly payments to your dependants for the remaining 10 years. However, if you passed away 19 years into the policy your dependants would only benefit from 1 years’ worth of payments.
Importantly, monthly payments, unlike life insurance, do not form part of your estate and are therefore not subject to 40% inheritance tax.
Other forms of insurance you may want to consider
Depending on the specific line of work you are in other forms of insurance may also be beneficial. These include;
- Key man insurance
- Health insurance
- Professional indemnity insurance
- Public liability insurance
- Product liability insurance
As entrepreneurs we are normally positive, forward-thinking, if sometimes impulsive individuals. But don’t let your ambition and drive stop you from provisioning financially for the worst-case scenario, especially during such uncertain times.
The most appropriate cover option will depend on your age, how many dependants you have and of course your available budget. We hope this article has helped explain the options.
Once you have your financial protection in place you can focus solely on driving your business forward, safe in the knowledge your loved one are comprehensively protected whatever the future may hold.