Income protection insurance ensures that you’ll continue to receive an income, even when you’re unable to work because of sickness or injury. It’s particularly important for people who are self-employed and don’t have the benefit of sick days or other protection that an employer can provide.
Even when it comes to workers' compensation, a self-employed person wouldn’t be entitled to receive benefits if they weren’t working mostly for one person or under contract to another organisation.1
If you’re currently self-employed, the importance of your ability to earn an income is significant - not only because you’re exposed to business and personal debts, but also because your family most likely depends on you for their welfare. A survey by the Insurance Council of Australia found that the owners of more than half of small to medium business enterprises in Australia had no income protection, and one of the main reasons for this was the perception that this type of cover costs too much2.
Yet, consider the alternative. What would happen if you were in an accident tomorrow and unable to work for months? Or years? The consequences of not having income protection could far outweigh the cost of getting covered.
What does it cover?
Income protection insurance policies that can be arranged directly through Choosi are able to provide a fortnightly or monthly income of up to 75% of your pre-tax income, up to $10,000 a month.
There are other income protection policies available through Choosi’s adviser partners that offer larger benefit amounts, and longer benefit and waiting periods.
The amount you receive will depend on how much you earn and the type of policy you choose.
Agreed Value Policy
Because income for self-employed people can fluctuate month to month, this policy allows you to agree on an amount at the time of application, not at the time of your claim.
Indemnity Value Policy
With this policy, you’ll be required to provide proof of your income at the time of your claim. Some insurers will review your income history for the past three years and choose the highest paid 12 month period.
How does it work?
When taking out income protection insurance, you’ll need to choose your level of cover and timeframes to determine your policy, and these will affect the cost of your monthly premium.
- Choose the percentage of your income you want to be paid out, usually up to 75%. The higher the percentage, the more your premium will be.
- Choose your waiting period. This is the amount of time you agree to wait before claiming on the policy, even while paying your monthly premium. Depending upon your insurer, you can choose from 30 or 90 days up to 2 years for some policies. Generally, the longer you choose to wait, the lower your premium will be.
- Choose your benefit period - that is, the length of time you want to receive your benefits for, if and when you claim. Insurers offer benefit periods of anywhere between six months and five years, with some offering a benefit period that will last until the age that the policy expires, usually 60, 65 or 70 depending on your policy. The shorter your benefit period, the lower your premium will be.
Some things to consider when choosing your Benefit Amount
As a self-employed person, there are a few aspects of income protection insurance that you need to be aware of when it comes to choosing your benefit amount.
- Income protection insurance generally covers income lost through personal exertion. It does not cover passive income or income that is derived through the employees that you hire. Therefore, when choosing a benefit amount, you should consider how much income you will lose directly as a result of you no longer being able to work for your business. You should not include rental or investment income, or the income you obtain from managing a business if that income will still be derived, regardless of whether you perform the role or not.
- Insurers will look to pay claims based on the actual income you have received prior to your injury or illness, not the income you expected to receive in the future. This is an important distinction, so you should look to cover yourself based on the income you have received to date.
- Insurers will pay claims based on your net operating income, after taking into account all expenses produced in acquiring that income. In order to verify this, the insurer will generally look to your tax returns and business records. So, you should ensure that the amount you cover yourself for is consistent with those records.
How do I take out income protection?
You can take out income protection through your super fund, a financial adviser or directly with an insurer.
It’s important to note that when applying for income protection insurance directly through Choosi, you can get cover directly over the phone. However, if you choose to go through an adviser, you may need to take a medical or blood test, and may be required to complete some application forms.
To compare a range of income protection policies from different insurers, call Choosi on 13 55 55.
- What is Workcover?
- Non-insurance in the small to medium sized enterprise sector
These articles are provided as reference material to allow more informed decision making, but are not intended as being a complete source of information on any topic. All readers should make their own independent analysis on the topic to make sure they have considered the aspects that are important to them.