Press Room

The importance of having Income Replacement Cover

We wish to stress the importance of taking out Income replacement cover for those who are contracting and have established their own limited companies.  As a Controlling Director of your company, you do not benefit from the normal employee benefits you would have if you were otherwise employed.

Its Aim

The aim of taking out such a policy is to cover your monthly personal outgoings should you contract an illness or have an accident, and as a result unable to work & no longer be in receipt of an income – sadly these situations do occur and it is therefore important to take out adequate cover.  You can claim as many times as you like during the existance of the policy and all income received from the plan will be free of tax.  The payment stops once you return to work.

The Amount that can be paid

As a rule of thumb, the maximum amount of cover that can be taken out is roughly 60% of your past 52-week earnings – with most providers, this also includes dividends.  So if you are earning £100,000 for example, the maximum monthly cover you can take out is £5,000, though this would probably be far too high for most.

Deferral period of payment

Depending on how much spare cash you have available, you can pick your own deferral period i.e. this is the amount of time you chose to wait before you receive your first payment on a claim of illness or accident. Typically this is either 4, 13, 26 or 52 weeks – the longer the deferral period, the cheaper your monthly premium will be.  The first income would typically be paid one month in arrears.

Period of cover

We would advise that you take out cover through till your selected retirement age (at which point your pension would commence).  There are also various options, such as guaranteed rates (i.e. your premium will never increase over the life of the policy) or linked to inflation.  Should you no longer need the cover at any point, such as if you decide you become fully employed and have full employee benefits, then you would simply stop paying the premiums and the contract would automatically cease.

Next steps

Taking out an Income Replacement policy requires specialist advice.  You first need to determine how much cover you think is necessary – this would typically be your main monthly outgoings such as your mortgage, council tax, shopping bills, insurance etc.  Through a panel of specialist providers we will be able to quickly obtain indicative quotes for you.  Our advice would be that the monthly premium be paid from your personal account rather than your business account as otherwise it would be taxed as a benefit in kind.  Once you are happy with one of the quotes we provide you with, you will then have to fill in an application form (which includes a health questionnaire) which will then be sent for underwriting.  Once they are happy to provide you with the cover, the policy documents will be sent directly to your home, the direct debit would then commence and the policy would go live.

In order for us to assist you further as well as receive indicative quotes, please feel free to have a confidential discussion with our financial advisor, Martin de Blocq, who can be reached on 0844 477 1757 or you may also wish to send an e-mail with any queries you may have to martin.dbvs@sjpp.co.uk