Whether you’re an independent contractor, sole trader or small business owner, being self-employed comes with its own rewards and challenges. While you’ve got more control over your projects and hours, there’s also more pressure and responsibility, especially if you become too sick or injured to work. For the self-employed, taking time off to recover from sickness or injury usually means income stops, but expenses don’t. This is where income protection insurance can help protect you.
What is income protection insurance and why might I need it?
Income protection insurance can replace up to 70% of your monthly income when an injury or illness leaves you unable to work. Many self-employed people don’t have sick leave to rely on[1], which could be a risk if you can’t work for months or years. Income protection is a way to financially protect you against this risk and can help cover your lifestyle and business costs.
If you’re not sure whether income protection is something you need, consider the varied personal expenses in your life such as rent or mortgage repayments, utility bills, and/or childcare fees. If you had to take time off work due to unexpected illness or injury, you would still need to cover these costs. If you’re not sure how you’d tide yourself over during unexpected times, it might be worth considering income protection.
Get your income protection online quote today
What are the benefits of income protection insurance for the self-employed?
When you’re self-employed, you rely on yourself for generating an income to pay for life’s expenses and your business overheads. When you’re unable to work for an extended period due to illness or injury, it could leave you stressed about how your business will keep operating. The right level of income protection insurance could put you in a better position to keep your business going, cover expenses, manage debt, and care for your loved ones. It’s peace of mind that you’ve still got enough to maintain your business and lifestyle, so you can focus on what really matters: getting back to full health.
You can use our calculator to help you decide how much cover you may want.
What are my options for income protection insurance?
When purchasing or comparing an income protection policy you will need to consider what benefit and waiting periods are appropriate for your personal circumstances and needs.
Your benefit period is the maximum length of time you’ll receive benefit payments for if you make a successful claim. For example, if you’ve selected a benefit period of five years, you may receive monthly benefit payments for up to five years if you’re unable to go back to work for that period. Income protection benefits are only paid so long as you are unable to work. Your insurer may need to confirm that you are following the advice of your treating doctor and that you’re still unable to work either in a full time or partial capacity during that time. Most insurers will offer between two and five-year benefit periods, or up to a certain age (like 65).
Your waiting period is the amount of time you’ll need to be working in a reduced capacity or off work after suffering your illness or injury before you start receiving benefit payments. For example, if your waiting period is 60 days, you won’t start receiving claim payments until 90 days after you became ill or injured, as the first payment is generally made one month in arrears. It’s important to note that the actual time until benefit payments start being paid will also depend on when you submit your claim and any dates reported by medical practitioners. You should always read the insurer’s product disclosure statement (PDS) for full details on your policy and its conditions.
Since March 2020, income protection insurance can only be purchased as an indemnity benefit. This means that the benefit amount you will be paid will be based on your income right before the claim (not your income at the time of application)[1]. Typically, 70% of your Pre-Disability income will depend on the Product. If your Benefit Amount insured is less than 70% of your Pre-Disability Income, then you are only covered for the Benefit Amount.
Depending on the terms of your policy, the insurer may assess your average income over a period to account for fluctuations. When assessing your income for a claim, the insurer might take all sources of income into account, such as income or business profits. The insurer will still ask for your income details when you apply, so they can factor it into your premium calculation.
How do I find the right income protection insurance for me?
There are a lot of insurance options available, and it’s important to do your research before buying a policy so you know you’re getting the right product for your needs. You can use our calculator to help you work out the level of cover you might want, and our comparison tool can compare income protection products from a range of Australia’s leading insurance companies.
The importance of reviewing your insurance
It’s important to review your insurance if you experience significant income changes so you can make sure you’re not under or over insured. It may be a little trickier for the self-employed to monitor with income fluctuations. It could help to schedule a review of your insurance periodically, just to check in and make sure it still reflects your average income and needs.
Protect yourself
Having a backup plan for your income is something worth considering, especially if you are self-employed. If you are not sure how you’d tide yourself over during unexpected times, income protection could be a suitable solution, so you’ve got a financial safety net if you become too ill or injured to work. If you want to talk through some income protection options, from some of Australia’s leading life insurers, you can speak with one of our expert consultants by calling 13 54 33, Monday–Friday, 9am–5:30pm (AEST).
Lifebroker only provides general advice, which means we haven’t considered your individual financial situation, objectives or needs. Before acting on it, please consider the appropriateness of the advice, having regard to these factors. Before making a decision to purchase or continue to hold a life insurance product, you should read the relevant Product Disclosure Statement (PDS). The PDS includes the details of the product issuer. The Target Market Determination for each product is also available.
INFORMATION PROVIDED IN RESPECT OF TAXATION LAW IS GIVEN IN GOOD FAITH AND FOR THE GENERAL INFORMATION PURPOSES OF AUSTRALIAN TAX RESIDENTS ONLY. IT IS BELIEVED TO BE ACCURATE AS AT 28 June 2023 BUT MAY BE SUBJECT TO CHANGE. LIFEBROKER IS NOT LIABLE FOR ANY LOSSES THAT MAY ARISE FROM RELIANCE ON THIS INFORMATION. LIFEBROKER DOES NOT GIVE, AND DOES NOT PURPORT TO GIVE, ANY TAX ADVICE. AS THE APPLICATION OF TAX LAW DEPENDS ON EACH PERSON’S INDIVIDUAL CIRCUMSTANCES, YOU SHOULD ALWAYS SEEK ADVICE FROM A QUALIFIED TAX PROFESSIONAL.
THIS DOCUMENT IS ISSUED BY Lifebroker Pty Ltd, ACN 115 153 243, AFSL 400209.
[1] Source: Self-employment, moneysmart.gov.au
[2] The benefit amount could be offset with any ongoing earnings (in the event the business continues to operate not at a loss). At claim time, your benefit could be adjusted based on offsets such as earnings/income, workers compensation, or sick leave.
Frequently Asked Questions
This depends on your regular income amount and how much you’d need to cover your living expenses and business costs if you couldn’t work for a while. This figure can be a little trickier for self-employed people to work out since income often fluctuates. To help you decide how much cover you may seek, you can use our calculator.
You may already have default income protection cover through your super fund. If you’re self-employed, you may want to check with your super fund to confirm how much cover you have and decide whether you’re adequately insured. You should also note that insurance premiums deducted from your balance will reduce your retirement savings.
You may still be eligible for income protection if you work in a hazardous or high-risk job, but you’ll likely have to pay more for cover. This is called a loading.
Your policy may also have more exclusions. You should check with the insurer for conditions and exclusions that may apply.
Income protection premiums you have paid during the applicable tax year may be tax deductible where the benefits paid replace lost income and you purchased your policy directly through your insurer.
The benefit payments you receive are generally considered part of your taxable income and taxed at your marginal rate. If you require additional information relating to your personal circumstances on this, you should consider obtaining professional advice by speaking to a registered tax agent.
Income protection premiums you have paid during the applicable tax year may be tax deductible where the benefits paid replace lost income and you purchased your policy directly through your insurer.
The benefit payments you receive are generally considered part of your taxable income and taxed at your marginal rate. If you require additional information relating to your personal circumstances on this, you should consider obtaining professional advice by speaking to a registered tax agent.
If I have private health insurance, do I need income protection cover?
Health insurance and income protection are not the same.
- Health insurance helps cover the cost of medical care. Depending on your policy, health insurance can include cover for surgical expenses and emergency healthcare, as well as extras like dental and optical.
- Income protection covers up to 70% of your monthly income so you can continue to meet your everyday living expenses when you’re ill or injured and unable to work temporarily.
The key difference here is that you can spend your income protection benefit payments in any way you like. For example, you could use your payments to cover the bills, groceries, or school fees, whereas health insurance is directly linked to the cost of your medical treatment and services. Some people have both types of insurance, so they have a plan for medical costs and for general living expenses. If you’re not sure whether you need insurance or what type of insurance may suit you best, you should consider obtaining professional advice.