Business Matters – Issue 42
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What’s your Plan B? Debunking 5 reasons why people don’t take out income protection
We can all see the logic of protection. We insure our cars, the contents of our homes and even our holidays and our pets almost as a matter of course. But have you considered protecting your most valuable asset: your income – and, by extension, your family’s quality of life?
Many financial advisers like to talk about the positive stuff with business owners – like extracting profit from your business, creating a solid exit plan and plotting how you’re going to enjoy that hard-earned retirement. But what happens if something happens before that end point?
While it’s uncomfortable to think about your business plans being derailed by illness – or worse – it’s vital to protect yourself, your business partners and your family from the unexpected. At Wellesley, we help our clients navigate these conversations, tackling those ‘What if…?’ questions proactively.
Mythbusting income protection
Only 6% of the working population have income protection.1 Here, we examine the biggest misconceptions that can put people off taking out income protection – and why they shouldn’t stand in your way. We also break down the key considerations for business owners and sole traders.
- “I don’t need income protection.”
If you value it, protect it.
It’s easy to be optimistic about your health and live by the mantra ‘it won’t happen to me’. But most people who find themselves unable to work due to illness or injury likely assumed it wouldn’t happen to them either.
Some avoid income protection because they believe the application and claims process is complex. Others assume their savings are the only safety net they need. But for business owners especially, personal and company finances are often intertwined.
Taking out income protection insurance might therefore stop you from having to dip into your savings, so you protect your future financial well-being too. It could even mean you don’t need to put money aside in an emergency cash fund either – so you could choose to invest that money instead in your pension or into a Junior ISA for the children.
- “Insurance is too expensive.”
You can’t put a price on peace of mind. Allocating a portion of your financial plan to protection is therefore both smart and strategic.
Rather than focusing on putting large amounts into your pension and concentrating on your exit planning, you could take an element of this funding towards protecting you and your family in case something happens in between now and exit/retirement.
That said, one element of the above myth is true – critical illness cover has become more expensive. As an alternative, consider income protection, which offers a similar outcome in a different manner: it doesn’t provide a lump sum but instead delivers ongoing income to help maintain financial commitments, including debt repayments.
- “I’m self-employed – I can’t get income protection.”
There are over 4 million self-employed people in the UK – none of whom receive employer sick pay or statutory sick pay.²
Being self employed doesn’t prevent you from taking out income protection – and it should be considered a crucial safety net. It can cover your personal income and ensure your fixed business expenses – such as rent, utilities and vehicle leases – are still paid if you’re unable to work. It safeguards both your lifestyle and your business continuity.
- “It won’t pay out.”
Scepticism around insurance is common, but the facts speak for themselves.
Between 2019 and 2023, major insurance provider Aviva paid out £5.37 billion in individual protection claims.² Remember, income protection is regulated by the Financial Conduct Authority and the Prudential Regulation Authority, which exist to ensure products work in consumers’ best interests.
- “It doesn’t cover pre-existing health conditions.”
Having a medical history doesn’t automatically exclude you from income protection. While cover may vary, many providers will offer policies with exclusions or adjusted premiums.
A good adviser will help you find the right provider – one that balances your needs, health profile and budget.
Protection considerations for limited company owners
Now we’ve debunked some common myths, let’s look at insurance options we often discuss with our clients.
There are a number of policies available to cover every kind of personal circumstance – and we’ve previously discussed shareholder protection, keyperson insurance, business wills and talking to your employees about protection. But have you considered Relevant Life Plans or Executive Income Protection?
Relevant Life Plan (RLP)
Ever had “death in service” benefits as part of a corporate package? An RLP offers similar protection, but for directors or key staff within a limited company – with significant tax advantages. Think of it like a mini death in service plan.
A RLP is a life assurance plan. The limited company takes out a policy on the individual that is then placed into a master discretionary trust for the individual’s chosen beneficiaries. These are extremely tax effective as they count as a business expense (rather than a personal cost), thus reducing Corporation Tax. It’s prudent to cover an amount that includes a pay-out to cover costs like clearing your mortgage upon death.
Contributions are not treated as a benefit in kind (P11D benefit) on the employee.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Executive income protection
Unlike individual income protection, this is where a limited company sets up executive income protection for an individual/individuals.
The advantage is that it takes out the cover and insures the individual or owner/director for their income (can be both PAYE + dividends), employer National Insurance contributions and pension contributions. For limited companies, it transforms a personal expense into a business deduction – a smart, tax-efficient move for owner-directors.
Protection considerations for sole traders
Sole traders don’t have the same business structure advantages – but they do have essential options.
Life cover
This is usually associated with covering a mortgage liability and can be on a decreasing, level or increasing benefit for a fixed term. They can be used to provide lump-sum death benefits for families or to cover Inheritance Tax liabilities in the shorter term.
Income protection
Pays a percentage of your income so you can continue to cover bills and outgoings if you’re unable to work or lose an income unexpectedly. You can choose the level and term of cover to suit you and your budget.
Critical illness cover
Pays out a lump sum if you suffer a specified illness such as a stroke, cancer or an event such as a heart attack.
Family income benefit
Pays income on death or terminal illness diagnosis to cover families on the death of a parent. It’s helpful for childcare costs or maintaining household expenses.
Protecting your future, as well as your present
No one can predict the future. But you can prepare for it.
Whether you’re a sole trader or managing a growing business, protection provides peace of mind. It ensures that your income, family and long-term plans are safeguarded – even in worst-case scenarios.
Your individual circumstances will always dictate what kind of protection is most suited to you and your business. That’s where professional financial advice comes into its own – so you can be sure you have the right insurance for your needs, helping to ensure a brighter and more secure future.
So, what’s your Plan B?
Please note that advice with regard to exit strategy planning may involve the referral to a service that is separate and distinct to those offered by St. James’s Place.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
SJP Approved XX/XX/XXXX
Sources:
1Financial Conduct Authority Financial Lives Survey (2022).
2Ipse, the self-employed landscape in 2023, accessed April 2024.
3Individual Protection Claims Report 2023, Aviva, May 2023 (Based on 50,600 claims).