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Income Protection for Self Employed Australians

Russell Cain Updated: 07 October 2021

Self-employed Australians have been hit hard by the Covid-19 restrictions, reducing their profits substantially. More than ever before, self-employed income insurance cover is essential.

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, you’d have no holiday or sick leave to help with your month-to-month expenses, which can be even more stressful if you’ve got a family to support.

Self-employed insurance helps with the continuation of your income stream at a time your need to focus on recuperating. Generally, personal income protection provides self-employed Australians with a monthly benefit of up to 70%, should you be unable to work for a specific period due to an illness or injury.

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What is personal income protection insurance for self-employed?

Personal income protection insurance for self-employed Australians provide you with a monthly benefit of up to 70% of your regular income when you’re unable to work for a specified period because of an injury or illness sustained at work or outside of work. Alternatively, a lump sum option may be available from select insurers.

Take note: Your benefit will usually not be paid immediately as income protection often includes waiting periods.

Generally, income protection policies protect you 24/7 anywhere in the world. Although, it is best to check the insurer’s product disclosure statement (PDS) to confirm the extent of the coverage provided.

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

Yes, generally, self-employed professionals can get income protection insurance for money earned through your own personal exertion or activities. If you’re unable to work because of an illness or accident, an income protection policy can provide you with up to 70% of your earned income. Also, premiums are generally tax-deductible, which helps you save 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.

Agreed value income protection is no longer available

As of 31 March 2020, Agreed Value income protection policies became unavailable for new customers. Agreed Value income protection was removed in an intervention effort by the Australian Prudential Regulation Authority (APRA) to help the income protection market become more sustainable.

An Agreed Value income protection policy allowed you to provide financial evidence of your income at the time that you applied; the monthly benefit was then calculated and “agreed’” or “guaranteed” according to your income at the time of taking out the policy.

If you needed to claim your income protection, you would receive this agreed amount even if your income was lower at the claim time. Compare income protection insurance for self-employed workers.

Should you get income protection if you’re self-employed?

You’ll typically want to protect your ability to earn an income if you have a mortgage to pay, outstanding debts or a family to support. When you work for yourself, there are no sick leave or employee benefits. An income protection insurance plan can help provide sufficient protection when you’re unable to earn money because you can’t work due to an accident or sickness.

If you own your own business and have employees, you are legally required to take out workers compensation. However, Workers Insurance cover does not typically provide benefits for self-employed Australians, which is why you might want to consider income protection.

Benefits of income protection when working for yourself

  • Provides up to 70% of your regular income
  • Premiums are usually tax-deductible
  • Helps cover monthly financial commitments like your mortgage and household expenses
  • Generally, 24/7 cover worldwide
  • Helps to pay outstanding medical bills
  • Flexible benefit period
  • Choice of waiting period
  • Provides cash flow to maintain your assets and investments

Self-employed people that might need income protection insurance

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What kind of income protection can you get?

Until recently, you had the option to choose between Agreed and Indemnity Value income protection. However, as of 31 March 2020, only Indemnity income protection insurance is available for purchase.

With Indemnity value policies, your income is usually verified at claim time, and benefits are typically paid in proportion to your current earnings. Meaning, any drop in your income will allow the insurance company to reduce the benefits you will receive at claim time. Pre-claim earnings are generally measured as income earned over the last 12 months, or the best 12 months over a specific period, for example, the previous two years.

However, this depends on your insurer; please make sure to read the PDS.

What other insurance policies might be relevant when working for yourself?

When owning your own business, you might want to consider purchasing:

How do you apply for self-employed income protection insurance policy?

When applying for income protection, you’ll generally follow the below steps:

  1. Select an Indemnity policy option: When you’re independently employed and your own boss, your income might fluctuate from year-to-year. Generally, your income at risk will be calculated based on the income you earned at the time when you made your claim. Typically, the calculation will be based on your average earnings over a period of no more than 12 months or over an appropriate period of time if your income fluctuates.
  2. Choose your waiting 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. Depending on the insurer, waiting period options typically include 14, 30, or 60 days, 3 or 6 months, 1 or 2 years.
  3. Select your benefit period: Your benefit period refers to how long your monthly benefit will payout, for example, 2 or 5 years, or up until your age 65 or 70.
  4. Tailor your policy: Your policy may also include some built-in and unique benefits, allowing you to modify your cover to best suit your 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.
  5. 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.

Frequently asked questions

  • Are you entitled to sick pay if self-employed?

    No, when self-employed, you will not be entitled to sick leave or paid holidays. Income protection provides you with financial security should you be injured or get sick as it covers up to 70% of your regular income when you aren’t able to work
  • How to show proof of income when self-employed?

    For Indemnity income protection, the insurer will generally require that you provide proof of income at claim time. You’ll also need to give the insurer:
    • Personal tax returns,
    • A profit and loss statement and
    • Your balance sheet.
  • What happens if you’re unable to work due to the Coronavirus?

    Should you contract Covid19, you’ll generally be able to claim from your income protection. Income protection policies usually do not have any exclusions for Coronavirus. So, if you meet all the terms and conditions for your policy, your income protection will help cover any loss of income while you recover. However, it’s best to check with your insurer as policies vary.
  • Is income protection insurance a tax deduction?

    Yes, if you’re listed as the policy owner, you’ll generally be able to claim your income protection insurance premiums when your policy is held outside your super fund, and you paid the premiums with you own money.
  • How much does income protection cost if you’re self-employed?

    The cost of income protection insurance for an individual who runs and owns their own business is generally dependent on your type of occupation, age and gender, health and smoking status, the amount of cover you purchase and the state you live in. 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 reduced premiums.
  • Can you get 100% of your income covered?

    No, you can generally only get 70% of your gross income covered, this is because if you were to receive 100% coverage, you might be less motivated to return to work after recovery.
  • 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 $70,000 if you pass away while already on a claim. However, it might be worth considering a separate life insurance policy with a more substantial lump sum payout if you have outstanding debts, a mortgage or a family to support.

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