Running your own business means wearing every hat from CEO to coffee maker. But contrary to what we all prefer to think, we’re not actually invincible. Each year, thousands of self-employed professionals discover this truth the hard way when illness or injury brings their income to a grinding halt. Some bounce back. Others watch their savings evaporate.
The good news? There’s a way to protect yourself without resorting to bubble-wrapping your office. This guide delves into the world of income protection for the self-employed, revealing how successful business owners shield themselves from life’s most expensive surprises.
What Is Income Protection Insurance?
In simple terms, income protection insurance pays some of your income if you’re unable to work. It can help pay your bills while you get back on your feet and recover from an injury. It won’t give you your full working income. However, it does come pretty close. Quality income protection insurance will pay up to 75% of your pre-tax income for a specified time if you’re unable to work due to partial or total disability.
Of course, like all good things, there are some potential problems. We have a few warnings to share with you, and some things to be aware of when comparing income protection policies. Some don’t fully protect the self-employed, and the last thing you want is to find out you’re not covered when you need to make a claim.
Quick Income Protection Tip: Each policy is a little different, so check the details carefully. One of the key things to look for as a contractor is what defines partial or total disability. You can check the insurer’s website or the product disclosure statement (PDS) for the definition and exclusions.
Can You Get Income Protection Insurance If You’re Self-Employed?
Here’s the real kicker: If you’re an independent consultant, contractor, tradesperson, or small business owner, most income protection policies won’t cover you if you lose a job. Most will also leave you stranded if a sub-contracted job is cancelled part way through the agreed period or project. Income protection also does not cover you for redundancy or if you suffer a down-turn of hours.
As a self-employed worker, you’re probably painfully aware that these are common occurrences. They are part of the risk you accept when you decide to run your own business. However, you’ll be happy to know that you do have a few options as a contractor looking for income protection insurance.
Crucial Insurance Tip: If you own your business and employ staff, you are legally required to take out workers compensation. However, workers compensation does not typically cover the self-employed. Instead, you’ll need a specialised income protection policy designed for sole traders.
You must satisfy certain criteria to be eligible to access sole trader income protection. Usually, you’ll need to:
- Have been self-employed in the same occupation for a minimum of two years
- Work a minimum of 20 hours per week
- Earn at least $20,000 per annum
- Be either an Australian citizen or permanent resident with working rights
Certain high-risk workers, such as truck drivers, can have a harder time obtaining income protection insurance. If you work in a high-risk field and do manage to secure a policy, you may have a longer waiting period or a shorter benefit period.
Obtaining insurance protection can also be harder for those working in the gig economy due to the inherent fluctuations of the industry. However, you shouldn’t lose hope. It could just be that you need to provide more documentation to support your application.
For information about income protection insurance, please click here.
What Documentation Do You Need To Apply For Sole Trader Income Protection?
To apply for income protection insurance, you’ll need to make sure your books are in order. The insurer will generally require that you provide proof of your circumstances. Required documents could include:
- Your personal tax returns
- A profit and loss statement
- Your balance sheet
How To Apply For Income Protection Insurance
Here are the steps to follow when applying for income protection insurance as a sole trader:
1. Select Your Policy Option
If your wage fluctuates, double-check your shortlisted policies, and choose one that allows you to apply with your best consecutive 12-month period within the last 2 to 3 years.
2. Choose Your Waiting Period
The waiting period is the time between when your medical practitioner states you’re unable to work and when you start receiving benefits. These can differ greatly per policy. Depending on the insurer, waiting periods can be anywhere from 14 days to 2 years. So it’s vital that you check this and choose a suitable option.
3. Choose Your Benefit Period
You’ll need to choose how long your benefits will be paid out for. This may be 2 or 5 years, or up until age 65 or 70.
4. Tailor Your Policy
You may choose to add features such as a specific injury benefit or opt to skip the waiting period for a predetermined time.
Income Protection Tip: ITP offers a range of income insurance options, so you won’t have to search for hours to find a policy that suits your needs. We’ll compare plans and prices for you in the one phone call, ensuring you’re protected in the ways you need to be for your circumstances and line of work. Contact us now for a free consultation.
Download this article: Income Protection for the Self Employed
How Much Does Income Protection Cost If You’re Self Employed?
The cost of income protection insurance depends on various factors including age, occupation, gender, health and smoking status, cover amount, state of residence, waiting period, and benefit payout duration. Generally, longer waiting periods and shorter benefit periods result in lower premiums.
Is Income Protection In Super The Same As Another Policy?
You can get income protection insurance through some superannuation funds, while other policies can be taken out directly with an insurer. Essentially, it is the same product. However, the differences tend to lie in how the providers structure their policies, and how they process claims.
Accessing income protection through a superannuation fund might offer fewer options. However, on the plus side, there might be a reduced waiting period or better benefit options available to you. Choosing your own options to fit your personal situations and needs might be a preferable option – however it might incur extra costs. This isn’t a decision to make quickly or lightly. However, as mentioned, ITP offers a comprehensive comparison service, helping you zero in on the perfect policy to suit your circumstances. So, if you’re strapped for time, we can take the hard work out of comparing policies for you.
Other Relevant Insurance Policies For Sole Traders
While income protection is an obvious essential, there are several other insurance policies that self-employed professionals should have on their radar. Let’s take a quick look at some of the most helpful forms of coverage available for sole traders in Australia.
Business Expenses Insurance: Covers essential costs when you can’t work.
Keyman Insurance: Protects your business if a key employee can’t work.
Public Liability Insurance: Shields you from claims of injury or damages.
Professional Indemnity Insurance: Covers legal costs for professional mishaps.
Product Liability Insurance: Safeguards you when your products go sideways.
Cyber Insurance: Responds when hackers come calling.
Equipment Insurance: Repairs or replaces essential tools and devices.
Business Interruption Insurance: Keeps your operation afloat during disruptions.
Of course, not every sole trader needs the entire list. However, it’s helpful to know what’s out there so you can tailor your coverage to suit your specific circumstnaces.
Is Income Protection Insurance Tax Deductible?
Business insurance expenses are generally tax deductible. If you’re listed as the policy owner, income protection premiums outside of your super fund can be claimed as a tax deduction if you have paid with your own money.
What Are The Benefits Of Sole Trader Income Protection Insurance?
Although some might look at it as an extra cost, there are several key benefits in deciding to opt for income protection insurance. As accountants, our favourites include:
- Income protection provides up to 75% of your regular income if you are sick, injured, or suffer loss of income (dependent on your policy)
- If you pay out of your own pocket, the premiums are tax-deductible
- Helps you cover your bills and take care of your family if you’re unable to work
- Will generally cover you 24/7 worldwide
- Will help you pay outstanding medical bills
- Offers flexible waiting and benefits periods to help with the premium cost
- Provides cash flow to take care of your businesses assets and investments
Extras To Look For In An Income Protection Policy
Enhanced Digital Documentation
Many insurers now offer streamlined digital application processes. Ensuring your financial records are digitally accessible can speed up the application process and reduce errors. It also gives you an easy, instant way of tracking progress on your application.
Adaptability to Economic Changes
Given the volatile nature of today’s economy, it’s crucial to choose an insurance policy that offers flexibility to adapt to economic changes. This includes options to adjust coverage levels and benefit periods as needed.
Income Protection Tip: Regularly review your income protection policy to ensure it remains aligned with your current financial and occupational circumstances.
Integration with Digital Health Platforms
Income protection insurance that works seamlessly with digital health platforms will give you a more efficient experience. These platforms can help track your health status, manage claims, and ensure your insurance needs are met in real-time.
Emphasis on Mental Health Coverage
The growing awareness of mental health issues has led to a broader inclusion of mental health coverage in income protection policies. Availability may vary, but a policy that covers mental health conditions can give you an added buffer of protection.
To book an appointment with an ITP Financial advisor, please click here.
As Australia’s Income Tax Professionals, ITP can help you with more than just your taxes. We provide free year-round financial advice. And we offer a full suite of insurance options, with policies designed to give you financial security for your business and your family. To get a better understanding of your finance and insurance options, speak with one of our friendly professionals by calling 1300 136 729.