When striking out on your own, there are more financial risks to consider than when working for someone else. Some of these risks, such as sudden loss of income, can be mitigated with insurance (income protection insurance in this case), but should you be spending more on insurance premiums at such a financially trying time of life? Let’s find out.
Protecting Your Income: Essential Risk Management Techniques
There is no doubt that your source of income is more precarious when setting up in business for yourself. The failure rate for new businesses is alarmingly high, and even with the best planning and decision-making, adverse economic conditions can quickly destroy a previously sound business. With this in mind, it’s crucial to implement income protection measures. Whether these measures include income protection insurance will depend on the specific set of circumstances you’re currently facing.
Deciding Whether Income Protection Insurance Is Required
To determine whether you should take out income protection insurance, consider the following factors carefully:
- Fixed Monthly Expenditure – Your fixed monthly expenditure is the total amount of outgoings that cannot be reduced, at least not easily. Include mortgage payments, if applicable, any outstanding loan payments and other fixed costs. The larger your fixed monthly expenditure, the more likely you are to need income protection insurance.
- Variable Monthly Expenditures – Under variable monthly expenditure belongs everything that varies in cost from one month to the next. This should include food, utility bills, leisure costs etc. In addition to noting average totals for variable monthly expenditure, it’s useful to identify the costs that can be voluntarily reduced if necessary and those that cannot. The more variable costs you have every month that cannot be voluntarily reduced, the more likely it is that some form of income protection insurance will come in handy.
- All Income Sources – The more income sources you have, the less likely you are to require income insurance. If you have several well-established sources of passive income to supplement your new business earnings, you may be able to cover all your living costs in the event of sudden business failure.
- Current Assets – Generally speaking, the more assets you possess, the easier it will be for you to survive a business failure without any help from a friendly insurer. However, unless the assets in question are liquid, this is not always the case. If any of your assets have corresponding liabilities, such as a mortgage on your home, don’t forget to include these in your calculations.
- Dependants – If you are single with no children and no ageing relatives to care for, you can survive a temporary loss of income more easily than a married parent of 5. There is no hard rule when it comes to dependants; just consider how many people depend on you for financial support and plan accordingly.
Having given careful consideration to each factor, you should now know whether you need income protection insurance. The next step is to solicit several quotations and pick the best one.
