Income protection insurance for the self-employed

Are you one of the 1.1 million independent contractors or self-employed Australians? Being self-employed means you can call the shots over how, when and where you work. For many, the decision to become a sole trader is driven by a desire for autonomy, control and flexibility over your schedule.

Along with registering for GST and figuring out how to make super fund contributions, you might be wondering if you should look into taking out an income protection insurance policy.

If you're looking for a level of financial security as a small business owner, taking out an income protection insurance policy can help you if you're unable to work due to illness or injury.

Can you access income protection insurance if you're self-employed?

You can still obtain income protection insurance even if you're self-employed. Income protection insurance can cover up to 90% of your pre-tax income for a period of 6 months and up to 70% of your pre-tax income thereafter for a specific period of time (known as the benefit period) if you're unable to work due to sickness or injury.

Most insurers will require self-employed and part time workers to meet certain conditions, such as working a specific number of hours per week, to be eligible for a policy.

Plus, remember that income protection insurance only covers the loss of your income (not the income of your entire business). Even if your business continues to operate while you're unable to work, you'll only be able to claim the lost income directly due to your own personal efforts that you've directly experienced due to being sick or injured.

Is income protection insurance available for sole traders?

Yes, sole traders can also secure income protection insurance. To get an income protection insurance policy, you will likely need to share proof of your income by way of tax returns or bank account statements.

Some income protection insurance policies will need you to show that you've been employed continually for a certain amount of time or working a specific number of hours each week (usually a minimum of 20 hours weekly).

The good news? Being a sole trader or self-employed isn't going to stand in the way of securing a policy with valuable cover, like income protection insurance.

Why is income protection insurance important for contractors and sole traders?

Small business owners, including contractors and sole traders, usually don't score the benefits typically afforded to employees (such as accruing paid sick leave, annual leave or workers' compensation).

If illness or injury means you're unable to work, how will you cover your personal bills and expenses?

Income protection insurance is all about providing a financial safety net. While it won't completely replace your income, it will assist you in receiving a stable income while you focus on recovering and getting back to work.

The key benefits of income protection insurance potentially include:

  • Keep your business afloat, as the income payments are able to be used how you wish and may be used to pay your suppliers, office rent, and other business expenses, even while you're not earning a regular income.
  • Cover your personal expenses such as groceries, utility bills and mortgage repayments. This may be especially important if you have dependents that rely on the income you earn.
  • Alleviate the burden of healthcare costs such as specialist visits and doctors’ appointments, helping you focus your energy on getting back to good health.

Did you know that your income protection insurance premiums can be claimed as a tax deduction if you purchase a policy direct (and not through your superannuation fund)? Brush up on what you need to know for tax time and prepare for June 30. Always make sure to seek out tax advice from a professional to understand if this applies to your personal circumstances.

How are income protection insurance premiums calculated if you are self-employed?

If you're looking to get income protection insurance, you might be wondering how your premiums will be calculated if you're self-employed.

Your premiums (regardless of your employment status) are determined by your age, gender, income, occupation and lifestyle factors, such as your smoking status. Plus, the duties you perform in your employment including as a contractor or freelancer play a major role in determining your premium amount.

As a sole trader, you'll also need to show how much you individually earn in the business before tax, directly due to your personal efforts and less any business expenses, being the income that the business would otherwise cease earning by your inability to work (usually through providing profit and loss or tax return statements). If your income is variable this is usually based on an average of your earnings over the past 12 months.

It’s important to always check the relevant Product Disclosure Statement (PDS) to accurately understand how premiums are calculated for your specific policy.

Did you know that since March 2020, income protection insurance policies are only offered as indemnity value policies? This means your income is assessed when you make a claim, not when you take out the policy.

How much income protection insurance cover do you need?

The level of cover you secure depends on the policy you select. Typically, income protection insurance can pay up to 90% of your pre-tax income for a period of 6 months and pay up to 70% of your pre-tax income thereafter. These monthly payments are capped at a certain amount and will be paid for an agreed length of time after a waiting period has been served.

Again, when it comes to income protection insurance for self-employed people, it's important to do your research and review the PDS to ensure you know what you are and aren't covered for (as well as key policy features like the benefit period and waiting period options).

What insurance you could consider if you're self-employed?

Now that you understand your income protection insurance options, you might be curious as to what other types of insurance you may wish to consider as a self-employed person. Sole trades and contractors may opt to consider other insurance policies, including:

  • Life insurance: offers a lump sum payment in the event you pass away or are diagnosed with a terminal illness.
  • Total and permanent disability insurance (TPD): a type of life insurance that provides coverage if you were unable to work after suffering a total and permanent disability.
  • Business insurance: provides financial cover for both material damage to your business' premises and contents as well as can provide financial loss cover from an insured interruption to the business.
  • Professional indemnity insurance: if you provide professional services or advice to your clients, this coverage can protect you from the legal costs that can arise from an act, commission or breach of duty in the course of your work.

Ultimately, income protection insurance can be valuable for protecting your source of income as a self-employed person. Without access to some of the usual protections afforded to employees, this type of insurance can give you the financial peace of mind of knowing you've got cover for if you're unable to work due to sickness or injury.

Ready to weigh up your income protection insurance options? Compare online now or by calling us on 1300 363 526.


Choosi doesn’t compare all brands in the market. This information is general only; it doesn’t take into account your personal objectives, financial situation or needs and shouldn’t be relied upon as advice. You should consider the relevant Product Disclosure Statement (PDS) and Target Market Determination (TMD) available on this website for more information and to ensure the product suits your needs. If you have legal, tax, or financial questions, you should consult an appropriate professional.