How to Find the Right Income Protection when Self Employed

Published: October 3, 2018

When working for yourself as a sole trader or small business owner, you are responsible for the failure and success of your business.

If you were to get sick or injured and unable to work for a period, you'd have no holiday or sick leave to help with your personal month-to-month expenses, which can be even more devastating if you’ve got a family depending on you.

Income protection insurance quotes

Personal income protection insurance for self-employed Australians provide you a monthly benefit of up to 75% of your regular income when you’re unable to work for a specified period because of injuries or illnesses sustained both at work and outside of work. Generally, income protection policies protect you 24/7 anywhere in the world.

However, please check the insurer’s product disclosure statement (PDS) to confirm the extent of the coverage provided.

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Can you get income protection if you are self-employed?

Generally, yes self-employed workers can get income protection insurance for finances earned through your own personal exertion or activities. Income protection policies can provide you with up to 75% of your usual earnings if you are unable to work due to a sickness or accident. Premiums are also generally tax deductible, allowing for further savings while also protecting your livelihood.

To qualify for self-employed income protection insurance, you generally need to be doing permanent part-time work, with some insurer’s requiring proof of at least 20 hours work per week on a permanent basis. However, this will depend on the insurance company you choose.

Self-employed people that might need income protection insurance

  • Independent consultants and contractors
  • Tradespeople, like plumbers, handymen and electricians
  • Small business owners

Should I get income protection if I’m self-employed?

Because you may not have annual or sick leave to fall back on, income protection insurance can help provide you with income when you’re unable to earn money because you can’t work due to an accident or sickness. While every self-employed person and sole trader is different, you typically need to insure your ability to earn an income if you have a mortgage to pay, outstanding debts or a family to support.

It’s important to know that, Workers Insurance cover does not typically provide benefits for self-employed Australians, which is why income protection should be considered when needing to protect yourself against the possibility of sickness or injury.

However, if you own your own business and have employees you are legally required to take out workers compensation.

Income protection for self-employed Australians can be used for:

  • Coverage for injuries and illnesses sustained at work and outside of work
  • Protects your personal cash flow so you can maintain your assets and investments
  • Providing for ongoing household expenses
  • Ongoing income while you recover
  • Additional medical costs you might have incurred
  • Keeping up with monthly financial commitments, like credit cards, mortgage and rent repayments

Benefits of income protection when working for yourself

How does income protection for self-employed Australians work?

Income protection generally pays a monthly benefit of up to 75% of your regular income when you can’t work because you’re injured or sick. However, a lump sum option may be available from select insurers.

Note; such a policy usually only covers the loss of income that is earned through personal exertion, meaning the plan covers you for the direct loss of income your injury or illness has caused.

Step Choose an income protection policy type

You’ll need to provide the insurer with proof of income when either applying for the policy or at claim time, depending on the kind of plan you choose.

When you’re independently employed and your own boss, your income might fluctuate from year-to-year. Finding a policy that allows you to choose the best 12 consecutive month period in the last 2 to 3 years.

Carefully review your circumstances before choosing between Indemnity Value and Agreed Value income protection.

  • Indemnity value: Income is usually verified at claim time and benefits are typically paid in proportion to your current earnings.
  • Agreed value: Must provide proof of income at application time, effectively locking in a pre-determined monthly benefit.

Step Select your waiting and benefit period

Depending on the insurer and the salary continuance policy you choose, you generally have a choice of waiting period and benefit period.

The waiting period is the time between when a medical practitioner states you’re unable to work because of the accident or illness and when you start receiving your income protection benefit.

Your benefit period refers to how long your monthly benefit will payout, for example, 6 months, 2 or 5 years, or up until your age 65 or 70.

Generally, the shorter the waiting period and the longer your benefit period, the more expensive your premiums will be.

Step Tailor your policy

Your policy may also include some built-in and unique benefits, allowing you to modify your cover to best suit your individual requirements.

For example, as a sole trader, you might want to consider a policy that offers a specific injury benefit. This benefit type allows you to skip the waiting period and receive your monthly benefits for a predetermined time should you suffer from a particular illness or injury.

Step Compare policies

You can find the best income protection insurance for self-employed people by getting quotes online from a variety of insurance companies and comparing their price and features side-by-side.

Important; review the company’s product disclosure statement (PDS) and familiarise yourself with their list of exclusions.

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Other insurance specifically for self-employed people

By combining income protection with the below policy types, you can cover your work and personal expenses, while potentially reducing your tax bill.

Business expenses insurance: Covers your fixed business expenses like rent, electricity and non-income producing staff wages if you can’t work because of sickness or injury. This type of insurance is also tax-deductible.

Keyman insurance: Generally pays a lump sum benefit when a key employee in the business is unable to ever work again or passes away.

Frequently asked questions and answers

How much does sole trader income protection cost?

The cost of income protection insurance for an individual who runs and owns their own business is dependent on your type of occupation, age and gender, health and smoking status, the amount of cover you purchase, and whether it's an Agreed value or Indemnity policy. Your choice of waiting and benefit period will also influence the price of your premium. Longer waiting periods and shorter benefit periods will usually result in lower premiums.

Can I get 100% of my income covered?

No, you can generally only get 75% of your gross income covered, this is to protect insurers and yourself from over insurance. Also, if you were to receive 100% coverage, you might be less motivated to return to work after recovery.

How do I show proof of income when self-employed?

When you work for yourself and have a fluctuating income, you might want to consider an Agreed value income protection policy because it generally requires proof of income when you apply for the policy. You'll usually need to provide the insurer with:

  • Personal tax returns,
  • A profit and loss statement, and
  • Your balance sheet

Will income protection payout if I die?

Depending on your employment status and the structure of your policy, income protection may pay 4 to 6 times your monthly benefit, up to a maximum of $75,000 if you pass away while already on claim. However, it might be worth considering a separate life insurance policy with a larger lump sum payout if you have outstanding debts, a mortgage or a family to support.

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