For self-employed people, the distinction between home and work can be unclear. It is not always obvious where one ends and the other begins.
That is the dilemma. The distinction is crucial when arrangements for protection insurance are put in place.
Personal and business protection have their own priorities. For people who are emp-loyed, prioritisation is str-ongly influenced by their employer's generosity. However, for the self-employed, striking the right balance requires help and advice.
Around 12 per cent of the working population have made the decision to start their own business and advisers have natural empathy with them. Characteristics of motivation and resilience are fam-iliar and their employment status can be identical.
But no matter how valuable these qualities are, they cannot guard the individual or their business against the unexpected.
Loss of income due to sickness or accident is a serious matter for any breadwinner but for the self-employed it can be catastrophic. Income protection must therefore be a top priority on their protection agenda.
The need for income protection is borne out by stat-istics from the DSS showing 2.62 million people have claimed sick pay or incapacity benefits in 1999.
In this year's Budget, the Chancellor reduced Class 2 National Insurance contributions, resulting in a saving of around £18 a month. Despite the rise in Class 4 levels, the net result is that small businesses where the partner is a spouse could be better off if their income is below the Class 4 threshold of £4,385. These savings could be used towards funding income protection benefit.
In many situations where a spouse is an employee, both incomes are totally dependent on the continued good health of the principal so it is important to include both salaries when setting income protection benefit levels.
Let's consider an example. Judy and Paul Campbell are aged 38 and 40. They are married with twin children, Ben and Fiona, aged 14. They are self-employed sports injury therapists and have a joint income of £58,000 a year and an outstanding mortgage of £42,000. Their protection priorities might be:
To pay off the mortgage if either were to die or suffer a serious illness.
To have an emergency fund if either of them suffered a serious illness.
To protect their income if either could not work because of prolonged illness.
To protect their income if their business failed due to insolvency.
To have access to immediate hospital treatment for the whole family.
The importance of life cover is self-evident but perhaps not so obvious to sole traders is the need to ensure that, in the event of their death, business debts are not passed on to their families.
Should they die, it is likely the business would be wound up and most employees would be entitled to redundancy under the Employment Protection Act 1978. Without suitable life cover in place, any redundancy payments would eat into the deceased's estate.
When considering whether to go it alone, part of the process includes the conduct of a personal audit. This includes looking at skills, contacts and expertise. A large number decide instead to go into partnership.
Partnership protection then comes to the fore and the inclusion of critical-illness cover has as much importance as life cover does.
The most common arrangements include a partner's cross-option agreement. The partners agree:
To grant options to the other partners.
To effect one or more life and/or terminal illness and/or critical illness policies.
To maintain the policies and request they are issued subject to trust for the primary benefit of the other partners.
To co-operate fully in pursuing any claim under a critical-illness or terminal-illness policy.
There are many opportunities for advisers to help the self-employed prioritise their protection needs. In the current positive economic cli-mate, it is likely that your self-employed clients are benefiting. By working together, you can identify any shortfalls in cover and plan effective ways to bridge the gap, ensure the prosperity of their businesses and secure them as a long-term client.