Income Protection for the Self Employed

The freedom and independence one has from running their own business can have a number of benefits – both financial and personal. However self employed workers often don’t have the luxury of being able to miss work if they are sick or injured. They also may not have the guarantee of steady work, annual or sick leave to fall back on.

This is where income protection or sickness and accident insurance comes in. Just like employees, self employed workers can take out a policy to protect their income if they suffer a sickness or accident and are unable to work.

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Advantages of self employed Income Protection

Income Protection can protect up to 75% of your income, allowing you to ensure you still have an income coming in if you are unable to work and suffer a loss of earnings, especially if the business depends on you to survive.

The money paid to you can be used towards:

  • Mortgage and Rent Repayments
  • Car Leases
  • Credit Card Repayments
  • School Fees
  • Groceries
  • Day to day living costs

How does income protection for the self employed work?

Like other income protection policies, if you are self employed you will be able to cover up to 75% of your income if you are unable to work due to a sickness or accident. You will also need to provide proof of income to the insurer.

I have insurance which covers serious illness, why do I need one that covers accidents and illness?

An income protection policy which covers you for accidents and illness is specifically designed to protect your income and may cover you for minor illnesses and injuries not covered by a critical illness policy.

Tax deductions for the self employed

You can claim a tax deduction on your income protection premiums, allowing you to save while protecting your income!

The amount of your deduction will depend on what you earn and your ‘marginal rate of tax’.

Example
If you are earning $80,000 per year, you will be able to claim back 37c for every dollar you spend on income protection. This equates to approximately $370 per year for a $1,000 annual premium.

Please note we are not tax advisers and you should consult a tax specialist or your accountant before making any decisions.

Tips for the Self Employed

number-1Tailor your policy type to suit you

It is always favourable to make sure you take out a policy which suits your needs. Tailor your waiting period and benefit period to suit your lifestyle, occupation and budget.

Waiting Periods:

While shorter waiting periods may be more suitable for someone who is self employed, it needs to be affordable.
Typical waiting period options include:

  • 14 days
  • 30 days
  • 60 days
  • 90 days
  • 180 days
  • 1 year
  • 2 years

Benefit Periods:

While longer benefit periods may be more beneficial, they are more expensive:
Typical Benefit Periods options include:

  • 2 years
  • 5 years
  • To Age 60
  • To Age 65
  • To Age 70

number-2Flexible Policies are Favourable:

Policies which provide flexibility are generally the better ones to consider. If your income fluctuates from one year to another, you may want to consider an income protection policy type which provides flexibility around proving your income. Try to find a policy which allows you to prove your income from the best 12 month period in the last 2 or 3 years. Income Protection is generally offered in two main policy types:

Agreed Value

In Agreed Value policies, you can lock in your income at the time of your application. You will generally need to provide:
Proof of income

  • Pay Slips
  • Business profit and loss statement

This policy type might be best if your income fluctuates and you want to lock it in.

Indemnity

Indemnity policies allow you to prove your income at the time of your claim. This option might be best if your income is relatively stable. Proof of income will require:

  • Income from previous 12 months
  • Best 12 month period during the last 3 years

number-3Reduce the waiting periods for Accidents

Don’t wait for your waiting period to finish before you get paid by taking out the Accident Option, also known as Day 1 Accident Cover.

Day 1 Accident Cover starts paying you a benefit during your waiting period if your disablement is a result of an accident.

The option pays 1/30th of your monthly benefit each day of total disablement during your waiting period.

number-4Don’t over insure yourself

Typically you can insure up to 75% of your income. However you may not need to insure this amount. Make sure what ever amount you are insuring is right for you and don’t take out cover that you don’t need.

number-5Cover yourself for your Own Occupation

Make sure your policy covers you for your own specific occupation – that is if you suffer a sickness or an accident, it prevents you from working in your regular job.

Other insurance options to protect your business

Business Insurance for the Self Employed

Most insurers we compare provide policies which can cover fixed business costs if you are unable to work. This type of policy, known as ‘Business Expenses Insurance’, can help keep your business going, allowing you the time to recover properly.

Typical expenses which can be covered include:

  • Accounting costs
  • Utilities
  • Fixed advertising costs
  • Cleaning costs
  • Salaries of non-income generating employees
  • Rent costs
  • Insurance premiums (excluding premiums for business expenses)

Keyman Insurance – Another option for your business

Keyperson insurance allows you to protect your businesses revenue, capital and ownership if a keyperson within the business is no longer able to continue working due to serious illness, total and permanent disability or death.

Our guide on Keyman insurance explains the different types of policies available to a business owner.

Published: July 13, 2015

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