Finding Income Protection when Self-Employed

The freedom and independence you get from running your own business can have many benefits – both financially and personally. However, working for yourself does come with additional concerns, like not being able to afford to miss work because of an injury or illness.

Not having the luxury of annual or sick leave to fall back on and the guarantee of a steady paycheck can lead to unnecessary stress. To gain more control over your finances, you might want to consider purchasing an income protection policy that meets your unique requirements.

You can take out a self-employed income protection policy to support you should you suffer from a sickness or accident and can’t work for longer than your waiting period.

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Do you need income protection when you work for yourself?

Whether or not you need income protection depends on your specific requirements, for example, do you have a family or dependents that rely on your salary or do you need an income to pay your day-to-day living expenses? Ask yourself whether you would be able to cope if were unable to work and even if you have an emergency fund or savings, how long will it keep you afloat.

The monthly benefit you’ll receive from your self-employed income protection policy can be used to pay your:

  • Medical expenses
  • Mortgage or rent
  • Car loan
  • Credit card repayments
  • Outstanding debts
  • Groceries and utilities
  • Retirement fund
  • Childrens’ school fees

If you can afford it, getting an income protection plan should take priority, even as an independent entrepreneur in your 20s and 30s you probably need financial assistance if you were to become sick or get in an accident and can’t work.

Can you get income protection insurance if self-employed?

Generally, yes, income protection is usually available to both employed and self-employed Australians. An income protection policy typically pays you a monthly benefit up to 75% of your income when you can’t work for longer than your waiting period, due to a sickness or accident. However, keep in mind that you will need to provide proof of income to the insurer.

Important: Make sure you review your Product Disclosure Statement (PDS) and understand the common reasons your policy might not pay out – list of exclusions.

Qualifying criteria for income protection when self-employed in Australia

Each insurer will have their own rules and guidelines regarding what qualifies as self-employed to obtain an income protection policy. Generally, to be eligible for such a policy you must have an occupation acceptable as a self-employed practitioner, either alone or in a partnership with others.

What’s covered in personal income protection insurance for the self-employed?

Income Protection insurance for the self-employed can protect up to 75% of your regular income (minus dividends, interest, rental income, income generated from your employees, and proceeds gained from the sale of assets) if you can’t work for onger than your waiting period because of an illness or injury. Such a policy, thus provides you with a monthly benefit if you are unable to work and suffer a loss of earnings.

If your income fluctuates from one year to the next, you may want to consider an income protection policy type which provides flexibility around providing proof of your income. Try to find a policy which allows you to verify your income from the best 12-month period in the last 2 or 3 years. Income Protection generally has two main policy types; Agreed – and Indemnity Value.

Agreed Value

With an Agreed Value policy, you can lock in your income at the time of your application. This policy type might meet the requirements of someone with a fluctuating income. You will generally need to provide the insurer with:

  • Proof of income,
  • Pay Slips, and
  • Business profit and loss statements

Indemnity Value

Indemnity policies require you to prove your income when you lodge a claim. This option might meet the requirements of someone with a relatively stable income. You’ll generally need to provide proof of income 12 months prior to claiming. However, select companies might allow you to submit income gained during the last 3 years to choose the best 12 months.

How much does it cost?

Your self-employed income protection premium is usually determined by a variety of factors, including your age and gender, general health, smoking status, occupation, premium structure, the state you live in and the amount of cover you want. Gather income protection quotes from multiple insurance companies and compare their premiums and benefits side-by-side.

For example, a 32-year-old self-employed male, owning a computer store in NSW, and earning $100,00 annually can expect to receive a $6,250 montly benefit for a maximum of two years should he be unable to work, due to an illness or injury. He can also expect to pay around $52.81 per month for his cover.

Note: These calculations are based on an stepped premium-style Indemnity income protection policy with 30-day waiting period for a non-smoking male(August 2019).

How to calculate the amount of income protection cover you need when self-employed

You can usually insure up to 75% of your personal exertion income. Use your profit and loss statement as a starting point. Make sure whatever amount you are insuring is right for you, only purchase what you need so you can afford it in the long term.

Remember to review your policy annually, or ask an insurance broker for assistance, because when you’re self-employed, your income can change a lot from one year to the next.

How to compare self-employed income protection insurance

To find the best income protection insurance for self-employed people, make sure you take out a policy that meets your requirements by comparing features, benefits and premiums of policies suited to your occupation from Australia’s biggest life insurance brands. Before you get started, make sure know the cover amount, waiting period and benefit period you want, as well as what you can afford to pay.

Waiting Periods

While shorter waiting periods may be more suitable for someone who is self-employed, it is generally more expensive. Typical waiting period options include:

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

Select insurers will offer you the option of adding Day 1 Accident Cover for an additional fee. This optional extra generally starts paying you a benefit during your waiting period, usually 3 days after your qualifying period, when you are disabled as a result of an accident.

You can typically expect a payment of 1/30th of your monthly benefit each day of total disablement during your waiting period.

Benefit Periods

While longer benefit periods may be more beneficial, they tend to be more expensive. Typical benefit periods options include:

  • 2 years
  • 5 years
  • To your age 60
  • To your age 65
  • Up to age 70

Cover yourself for your Own Occupation

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

Frequently asked questions and answers

Is self-employed income protection insurance tax deductible?

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’.

However, the monthly benefit payment you’ll receive will usually be taxed as it is viewed as income earned.

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

What other insurance should I consider when self-employed?

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 plan, 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: Generally, allows you to protect your businesses revenue, capital and ownership if a key person 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.

Can you claim on two income protection policies?

While you can generally have 2 income protection policies, you must make sure you don’t over insure yourself. The combined maximum benefit you can receive on both plans is usually limited to 75% of your regular income.

Can I cover 100% of my income?

Income protection insurance is designed to motivate you to return to work after you’ve recovered from an accident or illness and thus generally only provides up to 75% of your regular income.

Published: August 14, 2019

Ask an Expert?

4 Comments

  • Hil Jones |

    What about when you’re over 65 YRS?

    • SPECIALIST
      Anneke |

      Hi Hil.

      From your comment, it seems you are referring to the maximum entry age for Income Protection Insurance and the income protection benefit period.

      Generally, most Australian insurers only offer income protection up to age 59 or 65. However, select insurers do offer income protection at older ages.

      Income protection expiry ages will also differ depending on your occupation. Generally, Blue Collar occupations expire at age 65, while White Collar might only expire at age 70.

      Both income protection and life insurance for over 65’s must be carefully considered.

      Because I’m not aware of your specific circumstances (age, occupation etc.) I won’t be able to tell you what would be your best option. To help you with your queries please fill in the quote form above or alternatively give us a call on 1300 135 205.

  • Robin |

    Why won’t the system accept the amount I place in the income box?

    • SPECIALIST
      Anneke |

      Hello Robin,

      Thank you for your feedback. I have reached out to our IT team to look into it.

      In the meantime, please contact us for immediate assistance on 1300 135 205 or send us an email with the variables you tried to fill in and we can provide you with a quote.

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