As a contractor you may review your finances fairly often and look at your current and projected earnings to enable you to set effective budgets, for you personally and for your business moving forwards. This allows you to set future personal and financial goals, which could centre on retiring early to planning that big holiday away with your family.
These plans and your current lifestyle are supported by you continuing to work and generating a regular income. But what happens if you are unable to work due to illness? Your level of income may well fall and your financial plans for the future may be compromised.
Although being off work for a prolonged period of time may not currently seem likely, the office of national statistics calculates that approximately 7.1% of the population are currently claiming incapacity benefits. This is twice the amount of people currently claiming job seekers allowance!
Some people may choose to use their savings in the event of illness to cover themselves for a short period of time, but what happens if you are still off work after 1 month, 6 months or even a couple of years?
This is where an executive income replacement plan can be used to protect you and your family. The plan will pay regular monthly amounts once you have been unable to work for a predetermined amount of time.
What benefits can an Executive Income Plan provide?
The deferrment period is how long you have to be ill before the policy pays out; the longer the period the cheaper the policy.
The policy will be set up in the name of the limited company and the premium will also be paid by the company. This premium will normally be classed as a tax deductible expense for the business and as such, a claim for corporation tax relief on the premium may be made. When a valid claim is made, the benefit would be payable to the company and it would be up to the company to then pass on a portion or all of the benefit to the contractor. When benefits are paid they may be taxed as a trading receipt.
Many banks are now asking for a relevant income protection plan to be in place prior to the instigation of any business loan. This style of plan has been used for, and continues to be used for this purpose.
This particular style of insurance is aimed predominately at limited companies with a small number of people seeking cover. There is no investment element and therefore no surrender value to the policy.
Although many contractors share the same financial issues, every individual contractor’s financial position is unique. Furthermore, individual family and personal circumstances will affect your needs. The right answer for one contractor, may be entirely inappropriate for the next. The most important thing to do, is to obtain advice from someone that truly understands the tax issues and demands that affect contractors.
Freelance Advisor partner Wealth Matters have been working with contractors and freelancers for over nine years and offer a free face-to-face meeting at their offices or within a 60 mile radius. For more information call 01582 720511 or email info@wealth-matters.co.uk.
