Will I need income protection if I'm self-employed?
In Australia, workers compensation is not available to self-employed workers, which means if you get sick or injured and can’t work, your income could dry up overnight. This is why income protection (IP) insurance is so important as it offers a safety net you wouldn’t otherwise have.
What can income protection be used for?
Income protection replaces up to 75% of your regular income. Payments can be used to:
- Keep your business running
- Pay the bills of the household
- Put food on the table
- Help with expenses relating to your care and recovery.
This guide looks at the ins and outs of IP cover and why every self-employed person should consider it.
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- Why should I bother getting cover in place?
- Who can actually qualify for income protection insurance?
- What is considered income for self-employed workers?
- Business Expenses Insurance: Another option you might want to consider
- Should I get agreed value or indemnity value cover? How are they even different?
- Is my premium tax-deductible if I am self-employed?
- Is the cover in my super enough?
- Should I get stepped or level premiums?
- Choosing the right benefit and waiting period
- Some other questions you probably have
- Ongoing salary when you can’t work: A major benefit is the peace of mind you will have from knowing you will receive up to 75% of your income if you are ill or injured..
- Cover for business expenses: If you are a small business owner, you will also have the security of knowing you will be able to keep your business running, particularly if you add business expenses cover to your policy. This takes care of fixed expenses such as office rent, staff salaries, utility bills and even hiring a replacement in your absence.
- Additional payment while you recover: Depending on the policy, additional costs may also be included in your cover such as rehabilitation expenses, additional benefits for specified injuries and the cost of hiring a professional nurse; all of which can reduce stress and help you focus on getting better and back to work faster.
- Premiums may be tax-deductible: Other benefits of income protection insurance include the ability to recoup some of your premium costs by claiming them back on your tax and being able to fund your IP cover through your superannuation.
You will generally qualify for income protection if you meet the following requirements:
- You're aged between 18-65
- Carry out at least 20 hours of work each week
- Have been working in the same occupation for at least 12 months before taking out cover
- You're an Australian resident
I'm a self-employed contract worker. Can I still get income protection?
Not all insurers will provide cover for contract workers. Some may require you to be employed on a permanent full-time basis. That said, there are some that offer cover provided you work at least 20 hours per week and have held the position for at least 12 months.
It's worth comparing options with an adviser to find out what cover options are available.
So I'm not covered by workers compensation?
Workers' compensation protects an employee if they suffer an injury or illness in the workplace and covers costs such as:
- Weekly benefits
- Medical and hospital expenses
- Rehabilitation expenses
- A lump sum payment for death or permanent disability
Self-employed workers don't qualify for workers' compensation in Australia. To be eligible for workers' compensation, you must be in a contract of employment with another person or company. It's the employer who is required by law to take out insurance on behalf of their employees. Because you work for yourself and are your own employer, you're not eligible for workers' compensation, which is why having income protection insurance is so important.
What is considered income for self-employed workers?
Most insurance companies recognise the income for self-employed workers as the income generated by their business or practice through their own personal exertion or activities. This is the case for a self-employed worker, a working director or partner in a partnership. Income does not include:
- Rental Income
- Revenue from sale of proceeds or assets
Business expenses insurance can either be purchased separately or as an additional option on your income protection policy. It covers your fixed business costs while you are off work from injury or illness by paying a monthly reimbursement. This means you can actually focus on your recovery and not mounting debt your business may be facing. Some of the costs that business expenses can help you cover include:
- Rent of your office or property that your business uses
- Utility bills
- Leases on cars and machinery
- Staff salaries and superannuation contributions
- Building, liability and indemnity insurance
- Security costs
Some other key benefits to consider:
- Most business expenses policies will pay up to 100% of your allowable business expenses
- Premiums are generally tax-deductible
- Locum cover is generally provided to cover cost of hiring a replacement worker
- Some policies will offer partial payment, when you are partially injured but still able to work at a reduced capacity
- Cover generally provided 24 hours a day, worldwide
When selecting an income protection policy, you will need to consider how your benefit will be determined that is: Agreed value or indemnity value. The type of policy you choose will vary depending on your circumstances. Basically, the two types can be described as follows:
- Agreed value cover is where your income is verified and agreed upon by you and the insurer at the time of taking out your policy. This means you will know from day one what benefit amount you will receive, regardless of any future fluctuations in your income.
- Indemnity value cover is where your income is verified at the time of making a claim. That means if it has gone down for any reason since you applied for cover, the lesser amount is what your benefit will be calculated on.
As self-employed workers can be more prone to fluctuations in income, taking indemnity value cover can be risky, as there is a real possibility that your income could have been reduced in the lead up to making a claim, meaning you will receive a lesser benefit than you may need to cover your expenses.
For this reason, many self-employed workers opt for the security of agreed value cover, even though it's around 20% more expensive. Some insurers have countered this trend by making indemnity value cover more attractive to the self-employed. They do this by reviewing the insured’s income history over the past three years at the time of making a claim and choosing the 12 months in which they received the most income to calculate the benefit.Back to top
As mentioned above, your income protection premiums are normally tax deductible. You can claim the premiums that you have paid when you complete your tax return and if you pay before 30 June, you can claim for the current year.
The ATO views any payment you have made or benefits you have claimed that take the place of your regular income as tax deductible, but you can only claim those expenses that are incurred in the generation of assessable income. Any payments or benefits of a capital, private or domestic nature such as accident, illness or death cover in policies like Life, Trauma and TPD Insurance are not tax deductible.
The amount you get back will depend on your marginal tax rate and it’s important to bear in mind that even though your premiums are tax-deductible, your monthly benefit payments will be assessed (and taxed) as regular income.
It’s worth noting that whether your premiums are deductible can be impacted by a number of factors including your employment status. It may be worth consulting a tax specialist to discuss your situation further.Back to top
Why fund through super?
Income protection cover is often available through superannuation. his can be advantageous to self-employed workers for several reasons:
- Premiums are usually cheaper for members, due to the fund’s lower group insurance rates.
- There is minimal impact on your cash flow, as premiums can be funded from your super contributions or super account balance.
- There is automatic acceptance, without the need for medical underwriting.
And the downsides?
There are however, some disadvantages to funding your IP cover through super and these include:
- Only basic cover is provided, with limited features and options (i.e. usually no agreed value option, rehabilitation expenses, cancer cover or crisis benefit).
- If premiums are funded from your super account balance, your overall retirement savings are being eroded.
- Because there is a third party involved (the fund trustee), claims can take longer to be processed.
- The claims process can be more complex, with benefits being retained inside the fund unless you satisfy the condition of release under the temporary incapacity definition.
- Most policies only pay a benefit for a maximum of two years.
- Premiums paid through super are not tax-deductible, unlike policies outside super.
Given the pros and cons, IP cover through super may not be suitable for some self-employed workers and a policy outside super with more features and benefits and an agreed value option may offer better value for money.Back to top
As well as deciding on agreed or indemnity value cover, another important consideration is whether to pay stepped or level premiums.
- Stepped premiums start out cheaper (calculated on your age at each policy anniversary date) and get progressively more expensive as you get older.
- Level premiums are more expensive in the beginning, but because they remain fixed, they become more affordable as time passes (especially after 8 years or more).
When deciding between stepped and level premiums, you need to consider factors such as your age, your budget and the number of years you plan to be self-employed. If you are young and just starting out and are unsure how long you will be running your business, stepped premiums may be a more attractive proposition because they are cheaper.
On the other hand, if you plan to be in business for the long haul, level premiums might be a better option, as despite their initial higher cost, they can save you a considerable amount of money over time.
Another important consideration with IP cover is time frames. In other words, what benefit period and waiting period should you opt for?
Benefit period uncovered
The benefit period is the period during which a benefit will be paid to you and the waiting period is the amount of time you will have to wait before any payment is forthcoming.
It’s all about how soon and for how long your insurer will be paying you, so a longer benefit period will increase your premium cost and a longer waiting period will reduce it.
Benefit periods range from 2 years (the maximum payable within super) to retirement age, so if you opt for a benefit period that allows for reasonable recovery time, you could effectively reduce the cost of your premium.
Waiting period uncovered
Waiting periods vary between 14 days and 2 years, so if you think you can survive on sick pay and savings for 3 months, opting for a waiting period of 90 days would reduce the cost of your premium by about one-third. It’s important to remember though that benefits are always paid a month in arrears, so you will need to factor that into your choice of waiting period.Back to top
How much can I be paid?
Most policies will provide up to 75% of your income to a maximum monthly benefit. The maximum benefit is generally around $10,000. This can vary between insurers, as an example Asteron offers a benefit of up to 80%
Do I have to work a minimum number of hours per week to get cover?
Most insurers will require to work a minimum of 20 hours per-week to qualify cover.
What happens if I go back to work but i actually need more time to recover?
You are generally eligible to resume receiving cover without having to undergo a new waiting period if you start your claim again within 6 months of having returned to work.
Is income protection available for contract workers?
Yes. It's possible to get cover if you are a contract worker and meet the minimum requirements for total hours worked.
Can I change my cover if I need to?
Yes. You can increase or decrease your level of cover at any time. Changes are subject to approval from the insurer.
How long do I need to be self-employed for to take out cover?
Most policies will require you to be self-employed for up to 12 months prior to taking out cover.
Can I get cover if I work for myself part-time?
Yes. You can generally get cover if you work part-time provided you work at least 20 hours per week.
Will I pay more based on my occupation?
Insurers class occupations and the risk they present differently. You may be required to pay a higher premium if you are engaged in a high-risk occupation.
Can I receive compensation from other sources if possible?
Yes you can receive other compensation/insurance provided the maximum benefit paid does not exceed 75% of your regular income.