When you’re self-employed, your business largely (if not entirely) depends on you. So insuring yourself against the unexpected makes sense.
If you’re looking for insurance, you may have come across two options – income protection and key person insurance.
So, what’s the difference between them? As we’ll see, while they both help cover financial costs in case of certain unexpected setbacks, they differ in the way they work – one helps the business keep going, while the other tends more to your personal situation.
Here are some key things to know.
Key Person Insurance
As a self-employed person, you’re probably also the most important person in your business. What would happen if you were unable to work due to a serious illness, injury – or worse? How would your business operations be impacted? If you have employees, would their income be at stake too?
Key person insurance allows you to have a ‘plan B’. It’s designed to help businesses offset the financial costs of losing a key staff member – in this case, you, the owner and director. Think of it as an insurance policy where the business is the key beneficiary. Your business may receive either:
- a monthly benefit to keep the business afloat until managers can find a way to adapt to the loss, or the key person returns to work, or
- a lump-sum amount that can be used to pay off debt, distribute money to investors, and close the business down if needed.
Key person insurance can be a good option for small to medium-sized businesses, but if you’re a sole trader, income protection may be a more appropriate option. Which brings us to the next point…
Income Protection Insurance
Unlike key person insurance, which is about protecting the ongoing viability of the business, income protection is designed to cover your own ability to earn an income if you were suddenly unable to work due to a serious injury or illness. You can insure up to 75 per cent of your gross pre-disability income, for an agreed period of time, and after an agreed wait period.
Income protection, alone or in combination with life insurance, can help you protect your family’s lifestyle and financial future.
Like to get a mix of both covers?
When it comes to protecting your business’s future, it’s not necessarily one cover or the other – both types have key benefits, and kick in at crucial times of financial need. Get in touch: we’re here to help you recognise the vulnerabilities of your business, your financial needs, and how to appropriately protect them.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.
