life insurance for self-employed workers

Life Insurance for Self-Employed Workers

Self-employed? Find out why life insurance is so important, and how it can protect you and your business.

Being self-employed can be an incredibly liberating experience, and those that are enjoy a number of benefits and freedoms that people who work for employers don't get, such as:

  • Being the sole decision maker in relation to how the business is run.
  • Setting your own hours and work schedule.
  • Having unlimited earning potential rather than relying on a salary.

However this independence can be a double edged sword, and while those who work for employers may be constrained by the organisational hierarchy of the company they work for, they also benefit from the safety net that it provides. Unlike them, as a self-employed individual you don't get:

  • Sick pay if you are ill.
  • Holiday pay if you take a break.
  • Workers compensation if you are injured at work.

For this reason, taking out life insurance is very important when you are self-employed, because if you are rendered unable to work due to death, illness or injury, your business will grind to a halt and you won’t be able to provide for your family’s needs. Life insurance can maintain your families standard of living and give you the necessary financial breathing space to ensure your business stays in operation.

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Coverage is the amount of money that you will be paid in the event of a claim. An insurance consultant can help you determine an appropriate amount. Calculator
Provides a lump sum payment if you become totally and permanently disabled and are unable to return to work.
Provides a lump sum payment if you suffer a serious medical condition. Cover can be taken out for 40-60 medical conditions depending on the policy you choose.
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What life insurance types should I consider?

Life insurance is basically an umbrella term for a multitude of different policies, all of which are designed to provide cover for different events and requirements.

Life Insurance TypeHow It Protects You
  • Term Life Insurance

Provides a lump sum to your beneficiaries in the event of your death or terminal illness. This can be used by your dependents to pay your funeral expenses and outstanding debts and as a source of income for the future. 

  • Total and Permanent Disability (TPD) Insurance

Provides a lump sum if you suffer an injury or illness that prevents you from ever working again. This can be used to repay debts, manage ongoing expenses and pay for medical bills and lifestyle modifications due to your disability. 

  • Trauma (Critical Illness) Insurance

Provides a lump sum payment if you are diagnosed with a specified illness such as heart attack, cancer or stroke. It can be used to hire a temporary replacement in your business and pay for your treatment and rehabilitation.

  • Income Protection Insurance

Pays a monthly benefit of up to 75% of your regular income if you are unable to work due to illness or injury. It can be used in place of your income to manage your personal and business obligations.

  • Business Expenses Insurance

Covers the ongoing costs of your business if you cannot work due to illness or injury. It can be used to pay fixed costs such as rent, employee salaries and insurance premiums. 

  • Key Person Insurance

Provides a lump sum if someone essential to the success of your business dies or suffers an injury or illness. This helps to cover the costs of that person’s absence from the business such as loss of sales and the cost of training a replacement.

The size of your business and the number of staff you employ will determine your need for some of these types of cover, but Term Life, TPD Insurance and Income Protection should be a priority for everyone who works for themselves.

Many insurers will allow you to purchase these life insurance types in bundles, which not only reduces the amount of underwriting required for your application but can also deliver substantially lower premiums along with some other benefits.

If you are still unsure of what policies are best suited for your situation it could be in your interest to speak with an insurance broker, who can assist you in this regard and engage with insurers on your behalf, saving you time and getting you value for money.

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Life insurance and tax deductions

If you are self-employed, the tax deduction rules on life insurance premium and benefit payments could be of interest to you. Each policy type has different guidelines when it comes to tax, with a lot depending on whether the policy is held inside or outside of superannuation.

Life Insurance TypeHow Tax is Handled
  • Term Life Insurance

Premium payments are not tax deductible except when the policy is held inside superannuation. However benefit payments are not taxed.

  • Total and Permanent Disability (TPD) Insurance

Premium payments are not tax deductible except when the policy is held inside superannuation. However benefit payments are not taxed.

  • Trauma (Critical Illness) Insurance

Premium payments are not tax deductible outside super (Trauma Insurance is no longer available inside super) and benefit payments are not taxed.

  • Income Protection Insurance

Premium payments are tax deductible outside super and inside super if you are self-employed. However benefit payments are taxable.

  • Business Expenses Insurance

Premium payments are tax deductible but benefit payments are taxed as part of assessable income.

  • Key Person Insurance

Premium payments are tax deductible but benefit payments are taxed as part of assessable income. 

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Things to consider when choosing a policy

When going through the process of choosing life insurance cover, a good thought process to follow is to ask yourself these four questions:

  • What type of cover do I need? Do I need cover for death, accident or illness or all three?
  • How much cover do I need?  What are my financial obligations and how much cover will I need to satisfy them?
  • How much will it cost? What is the average cost and which policies provide the best value for money?
  • Who is the insurer? Are they an established, trusted provider with a good reputation and solid payment history?

You should take your time to research different policies and don't be afraid to ask for help. Most life insurers have consultants you can speak with to get more detailed information on their products, and as mentioned previously it could also be beneficial to engage the services of an insurance broker.

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Compare life insurance quotes with the help of an adviser

William Eve

Will is a personal finance writer for specialising in content on insurance. While he cannot give personal advice to clients, Will enjoys explaining the intricacies of different types of protective cover to help individuals and businesses find affordable cover that won't leave them underinsured.

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