Even if I have to stop work, my expenses don’t stop …

HMMM ... that's a point worth considering.

 

Like many self-employed people you have income protection insurance that covers you for up to a maximum 75% of pre-tax income.  This in itself is a sensible approach.

However, such a policy isn't designed to cover things which don't stop even if you do.

What things?

 

Leasing charges on capital purchases.

Bank charges.

Business phone bills.

Wages for employees not involved in generating income.

Rent on business premises.

 

This small listing is not at all exhaustive, but it shows the potential costs you will face if you can't work

To address this, life insurers have developed business expenses (BE) or business overheads insurance (BOI)).

 

How does it work?

It works pretty much the same as  your income protection does.  The same definition of disability applies and you still have an excess or waiting period - two or four weeks - but the full payment period is 12 months or 18 months is the full payment of the insurance used up within 12 months.

A further difference is in how much you can cover.  Income protection insurance is limited to 75% of pre-tax income.  By contrast you can cover up to 100% of your expenses with BE.  To conclude, let's take a small example.

Bill, the electrician has ongoing expenses of phone, lease of his van, accountant fees, wages for his receptionist and other costs totalling $7650 per month.  He can take out a BE policy and cover those thus allowing him to recover without the worry.

 

Author: Paul Herring.

Paul is Principal Financial Adviser at PCH Financial delivering advice on financially protecting your life, your income, your family and your savings.