014 SOLE TRADER PROTECTION – HOW TO CREATE A SAFETY NET WITH INSURANCE.
In this episode, Naomi Greatorex talks us through insurance policy options for sole traders.
Naomi Greatorex is Founder and Managing Director of Heath Protection. Her business gives specialist protection advice to clients while working alongside accountants, wealth managers, mortgage brokers, and other professional connections as a specialist consultant.
Lisa Conway-Hughes is a Chartered Financial Advisor, a Fellow of the Personal Finance Society and is founder of LCH/Wealth.
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If you would like to chat about financial advice please get in touch with abi@lchwealth.co.uk who will arrange a meeting with the right person for you at LCH/Wealth.
Show Transcript
Lisa Conway-Hughes: Hi. So, welcome to today’s show. Today we’ve got Naomi back on and we’re talking all about how to create a safety net if you’re a soul trader using insurance. So, thanks Naomi. And as a reminder, you are a director of your own um insurance brokerage um Heath Protection. So, I’m self-employed. Um I’m not in a limited company, let’s say. What should I be thinking about when I just when I just get going?
Naomi Greatorex: So I think the first thing to think about for any soul trader is um what happens with your income if you can’t work because your your whole way of paying yourself is based on you being able to get up in the morning and go to work. So I think for soul traders for people that are working for themselves freelancers you know what you’re thinking about there is okay well what happens next? What happens if I break my leg? what happens, you know, if I’m diagnosed with cancer and it and it really is it’s covering all sorts of eventualities, but income protection is there to protect you in case you can’t work.
Lisa Conway-Hughes: So, if I can’t do my particular job, that’s quite an important thing, isn’t it?
Naomi Greatorex: On a lot of Yeah. If I can’t do my particular job due to any illness or injury, it’s going to pay me out a monthly income tax-free.
Lisa Conway-Hughes: Yes. Um for me to just take time to get better. And what I like about a lot of income protections is they’ll allow you if you can do half the job because you’re you’re betterish but you couldn’t be full-time, they’ll pay you half as well, won’t they? So, they really do want to help you get back to work.
Naomi Greatorex: Yeah, they do a lot about sort of rehabilitation and getting you back into your job. When you look, I mean, all insurers are different, but lots of the insurers now do what you’re what you’re talking about there, which is proportional payments. So they will pay you a portion based on you going back and rehabilitation and and support there. So yeah they do they want to support you as well obviously get back to work.
Lisa Conway-Hughes: I know when I had um an income protection as a soul trader I when I did my backend for example they’d pay I think it was about half I think it’s about 30 35 for a physio appointment up to I think it was maybe six that I could claim. So there’s it’s more than just they’re also trying to prevent you from getting sick in the first place aren’t they?
Naomi Greatorex: Yeah, they don’t have to claim for a long time. Yeah, I think because it makes sense for them as well, you know, because they don’t want people to be off long-term sick if they can help you back to work. So, yeah, lots of the income protection policies now have also what’s called added value benefits which are included and and give you access to different treatments.
Lisa Conway-Hughes: And I mean, if you if I put myself into the shoes of a soul trader, when you’re just starting out, you don’t really feel you can afford very much. So I mean I would recommend that people work out their pricing based on what they’d need to be as covered as they were when they were employed. So usually people have their are working and then go to become self-employed. You need to build into your hourly rate or your fee how much you need to pay in your pension, how much you need to make in profit, your um income protection, critical illness life cover. All those things you’re used to in the employed world. You need to make sure that’s factored in your costings, don’t you?
Naomi Greatorex: Yeah, 100%.
Lisa Conway-Hughes: But what can you do at the beginning just to keep insurance cheap?
Naomi Greatorex: I would say with income protection, you’ve got two options. And so it is worth having a conversation with an advisor to talk through um what’s the best option for you when you’re first starting out. So you can have what we call full full-term income protection, which means that you can have a unlimited amount of uh a claim. So if you were sick from today until retirement and your policy covered you until retirement, it would pay you a monthly sum every month until you retire.
Lisa Conway-Hughes: You know, I actually met a man where he had had a brain tumor, non-cancerous, but he was no longer able to do such a stressful job because he was quite senior and his income protection payout for his whole career at his previous high salary. Um, so I mean, incredible life a life-changing diagnosis, but then life-changing that you um have that safety net to never have to worry about money again.
Naomi Greatorex: Yeah, it is. It definitely full-time income protection if you can afford it is is so worthwhile because when you look at the length of claims that some people make it that it can be lengthy. You know, you’re looking at not being able to do your own occupation. So if something happens to you which means that that is now impossible, that’s what the income protection policy says.
Lisa Conway-Hughes: And isn’t the average payout seven years?
Naomi Greatorex: I can’t remember exactly, but it’s longer than you think it would be. The average term for claim with income protection is 7 years. And in LV’s um claims paid information that they released last year, their large their longest claim was for 38 years.
Lisa Conway-Hughes: There’s always that stat banded around that we’re one or two paychecks away from being so un um homeless, the average person, because we just don’t have enough in cash. Imagine not having an income for seven years or 38 years. That would change your financial future completely, wouldn’t it?
Naomi Greatorex: It would completely change your financial future. And people have far less um you know, saved when you’re first starting out. I know when I started my business, you know, it’s difficult, you know, when you’re having to balance all of the outgoings as a as a self-employed person, it can really into your savings. So, what income protection is doing is making sure that your income is protected.
Lisa Conway-Hughes: So, I’ve got the two options, full payout for as long as until retirement or what is it? What is a typical shortterm contract?
Naomi Greatorex: Yeah. So, a short-term contract would be two years. So a typical short-term contract would be two years. So what that means is any single claim will only pay out for a maximum of two years. So if you’re off sick for 3 years, it would pay out for the first two and then it would stop. If you were off for 18 months, there would be no effect to you because you’ve got up to two years.
Lisa Conway-Hughes: And what if I got sick again later on?
Naomi Greatorex: You can claim multiple times and you could claim multiple times for 2 years, but there needs to be a gap in between. So and you need to be back in full-time employment. So it is slightly different because what they’re doing there is they’re looking at yeah you’ve been off for two years then you return to work and then they’d be looking at how much you’ve been earning when you’d gone back for that year before you claimed again.
Lisa Conway-Hughes: I put short-term income protection in place for my mom because well she’s my mom so she’s older than me. She was nearing retirement and we just looked at the cost of the full protection versus the couple of years. she was say 5 years away from retirement and the cost was a lot lot less. So we just insured her for those two years and thought she’d just have to retire early. So I think it’s about making it fit you and your budget isn’t it at the beginning.
Naomi Greatorex: I think so. I think so. And also you what you’ll find is depending on your occupation is going to depend on how much you pay. So if you’re doing a job which is more risky. So you’re doing a job which is quite manual the premiums might be more expensive than if you’re doing a job you know which is more administration.
Lisa Conway-Hughes: Well I always remember I was surprised that teachers are always a class three. So class one’s not risky. Teachers are they still a class three?
Naomi Greatorex: Teachers are still more expensive. Yeah. Because I think what the insurers are also looking at is the likelihood of claim. So unfortunately I think teachers teach are stressed and take time off work and therefore it is incorporated into the premium that you pay.
Lisa Conway-Hughes: Yeah. And and I think isn’t it the biggest claimments are first of all um anything to do with your skeleton so bad backs.
Naomi Greatorex: Yeah.
Lisa Conway-Hughes: Then mental health and then you go on to the serious illnesses like cancer, heart attack, stroke.
Naomi Greatorex: Yeah. About 60% of all claims are muscular skeletal and um mental health.
Lisa Conway-Hughes: I often find that people are a bit confused about what’s the difference between income protection and critical illness and which should you have as a soul trader if you could only have one.
Naomi Greatorex: Yeah, they are they are different and they actually complement each other. you know, you you have because with the income protection, you would have what we would call a deferred period at the beginning. So, you might say, okay, well, I think I’ll be okay for say 2 months or 3 months. You’d set your deferred period and then the income protection would pay then after the deferred period and income up to the up to 60% of what what you’re earning. And so, that would pay you then monthly each month.
Naomi Greatorex: With critical illness, what it’s saying is, okay, this is a life-changing event, like you’ve been diagnosed with cancer, you’ve had a heart attack or, you know, something horrid, something really, really horrid. And what it’s saying there is, okay, here is a tax-free lump sum. It’s paid on diagnosis, so it’s paid fairly quickly. And then that policy finishes, and that money is yours to do with what you feel you need. So it could be to pay off part of your mortgage, could be to pay for private treatment, could be to make some changes in your home because you need, you know, you might need assistance or change to the structure of your house. So it really can be used for absolutely anything.
Naomi Greatorex: So they complement each other because income protection will give you just enough to pay your bills, right? So that’s what that’s designed to do. And critical illness is designed to give you a larger lump sum to make some life-changing changes.
Lisa Conway-Hughes: And if you could only have one, which one would you have as a soul trader?
Naomi Greatorex: I would have income protection.
Lisa Conway-Hughes: Yeah, me too.
Naomi Greatorex: Because I think it is because it’s based on any sickness, disability or accident. It is it’s more, you know, all encompassing as such. And also it gives you an income and income is is the first thing that you need. And it’s it’s worth pointing out that if you have both and you are poorly enough to claim on both, both will pay out.
Lisa Conway-Hughes: Yes.
Naomi Greatorex: They’re not going to compete against each other. Exactly that. So it’s not like, oh, I’m claiming on my income protection, I can’t have my critical illness. Yeah. If you were diagnosed with cancer, your critical illness policy would pay out. And then if you were off sick for a period of time, then your income protection would pay monthly.
Lisa Conway-Hughes: And then what mistakes do you see that people make that you just wish they’d gone to a broker because they could have avoided it?
Naomi Greatorex: Yeah, I think people not understanding what they’re buying. And I think income protection is a complex product. So I have clients that say, “Oh, I’ve been on a comparison site and I’ve done a quote and I can I can get my policy cheaper.” Um, and then they will send you the quotes and it’s an age costed policy.
Lisa Conway-Hughes: So what does that mean?
Naomi Greatorex: Yeah. So by age costed, what that’s doing is it’s giving you really cheap premiums or cheaper premiums up front and each year as you get older, the policy will increase based on your new age. So it is a type of reviewable policy. So the contracts that we would talk about usually with clients are what we call guaranteed premiums. So, it might be slightly more expensive to begin with, but because it’s a long-term policy, the overall premium is cheaper and you’re guaranteed to know exactly what you’re paying.
Naomi Greatorex: And I think that could be a problem because people don’t understand. It says no, you know, you wouldn’t understand what age costed means unless you work in the industry. It’s jargon. So, I think that is a big one. I think also people not understanding the importance of not overinsuring yourself. So the maximum you can have is 60% of your income. And if people are overestimating what you’re going to earn, you could end up paying um more than you more than you can claim for overinsuring yourself.
Lisa Conway-Hughes: And I also think people would go on a comparison website, buy say accident, sickness and unemployment cover which is only going to last a year and they think they’ve bought a full-on income protection that’s going to cover them for their whole working life.
Naomi Greatorex: Yeah. And also ASU isn’t or accident and unemployment isn’t underwritten. So it’s one of those general insurance policies where you’re not really they’re not asking all of the health questions up front. Whereas with the types of insurance that we deal with, they are fully underwritten. So you know that as long as you’ve answered all the questions correctly that you are fully covered and it’s well I think you mentioned that 6% of self-employed people have income protection.
Lisa Conway-Hughes: Do you think that’s just based on cost alone? They think it’s too expensive or is it just time?
Naomi Greatorex: I think we don’t talk enough about income protection and unless you’re going for a mortgage, I don’t really think people are talking about it. So, maybe they don’t know it exists.
Lisa Conway-Hughes: Exactly.
Naomi Greatorex: Unless you’re talking to your accountant and your accountant’s being proactive and saying, “You’ve just started a business. You need to think about your income.” I don’t I don’t know where you would get that advice.
Lisa Conway-Hughes: And if I didn’t want to use a broker, how would I even begin to get my head around the small print? Are there any resources out there that can compare the terms and conditions of one provider with another?
Naomi Greatorex: I don’t really think there is. I mean, we do a lot of work with um with our clients talking them through the differences in contracts. I mean, you can go on the comparison sites and it will give you is it compare price? So, compare price and it might give you a bit of information, but it’s not going to talk to you about the real nuts and bolts of that policy and what it actually does.
Lisa Conway-Hughes: And anything else you can think of that we should mention for our soul trader audience?
Naomi Greatorex: Private medical insurance I think is another one because I think if you can’t get into work because you’ve injured yourself or you need an operation I think that is that is a really valid type of insurance. We’re seeing a lot more people coming to us for private medical insurance and I think that’s because the waiting lists are so long or or perceived to be long for the NHS. Depends on what you’re having, what what operation you need as well to how you know minor or major. If it’s a minor operation, you could be waiting a lot longer, but that may mean that you can’t do your job um while you’re off. So, I think really assessing and thinking about the impact of those things happening to you. So, I think that those those I think are the major ones.
Lisa Conway-Hughes: Perfect. Well, thank you for your time, Naomi.
Naomi Greatorex: Thanks, Lisa.
