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Income protection insurance for self-employed workers

Why is income protection so important for the self-employed?

In Australia, self-employed workers don't have access to workers compensation, 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.

Income protection helps you keep up with the cost of life

Income protection generally replaces up to 75% or 85% 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.

Receive an income protection quote for self-employed workers

Name Product Short Description Maximum Monthly Benefit Maximum % of Income Covered Maximum Benefit Period Waiting Period
Protect your lifestyle with a new eligible Virgin Income Protection policy and you can earn up to 40,000 Velocity Points. Ends 31 October 2018. T&Cs apply.

$10,000
85%
5 years
14, 28, 60, or 90 days
Cover up to 75% (to a maximum of $25,000) of your monthly income with NobleOak Income Protection. Take out cover before 28 September 2018 and get your first month free. T&C's apply.

$25,000
75%
2 years or to the age of 65
30 or 90 days
Cover up to 75% of your monthly income if you can’t work due to illness or injury, up to a maximum of $10,000 a month. Take out cover today and you could get a bonus $100 Gift Card.
$10,000
75%
5 years
30 or 90 days
Cover up to 75% (to a maximum of $10,000) of your monthly income with Guardian Income Protection.
$10,000
75%
5 years
30 or 90 days
Receive up to 75% of your income (up to $10,000 per month) if you're unable to work due to serious illness or injury.
$10,000
75%
5 years
30 or 90 days
Receive up to 30% off in your premiums if you’re in good health and meet BMI qualification tests. T’s and C’s apply.
$10,000
85%
24 months
14 or 28 days

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Why should you bother getting cover?

  • Ongoing salary when you can’t work. If you find yourself unable to work because of illness or injury, you can rest easy knowing that you will receive up to 75% or 85% of your income.
  • 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, you may have coverage for additional costs such as rehabilitation expenses, additional benefits for specified injuries and the cost of hiring a professional nurse. This gives you one less thing to stress about and lets 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.

Do you qualify for income protection insurance?

Generally, to qualify for income protection you'll 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

Can self-employed contract workers get income protection?

Yes, you can generally find 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.

Workers compensation for self-employed?

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:

  • Dividends
  • Interest
  • Rental Income
  • Commission
  • Revenue from sale of proceeds or assets
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Should you get agreed value or indemnity value cover?

When choosing an income protection policy, you'll 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. Agreed value 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. Indemnity value 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.

Learn more about how agreed value cover works

How should you structure your premiums?

As well as deciding on agreed or indemnity value cover, another important consideration is whether to pay stepped or level premiums.

  • Stepped 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. 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.

Income Protection Stepped and Level Premiums

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Choosing the right benefit and waiting period

Another important consideration with IP cover is timeframes, in other words, what benefit period and waiting period?

Benefit period uncovered

The benefit period is the amount of time you receive payments from your insurer. Benefit periods range from two years (the maximum payable within super) to retirement age. Your choice of benefit period will impact your premiums: the longer the benefit period, the higher the cost. However, choosing a longer waiting period might reduce your premiums.

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 three 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.

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Is your premium tax-deductible?

Your income protection premiums are normally tax deductible. 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.

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Pros and cons for income protection through super

Why fund through super?

Income protection cover is often available through superannuation. This can be advantageous to self-employed workers for several reasons:

  • Premiums are usually cheaper for members, due to the fund’s ability to buy cover en masse and pass those savings onto its members.
  • There is minimal impact on your cash flow, as premiums are funded by your super contributions or super account balance.
  • There is automatic acceptance without the need for medical underwriting.

And the downsides?

There are some disadvantages to funding your IP cover through super and these include:

  • Only basic cover is provided, with limited features and options (ie. 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.
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Business expenses insurance: Another option you might want to consider

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
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Some other questions you probably have

Receive quotes for income protection if you are a self-employed worker

Picture: Shutterstock

Richard Laycock

Richard is the Insurance Editor at finder, and has been wrangling insurance Product Disclosure Statements for the last 4 years. When he’s not helping Aussies make sense of the fine print, he can be found testing the quality of Aperol Spritzes in his new found home of New York. Richard studied Journalism at Macquarie University and The Missouri School of Journalism, and has a Tier 1 certification in General Advice for Life Insurance. He has also been published in CSO Australia and Dynamic Business.

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2 Responses

  1. Default Gravatar
    lanaMay 4, 2018

    if going overseas had an accident while over there and have income protection will this cover me when I get back

    • finder Customer Care
      NikkiMay 4, 2018Staff

      Hi Lana,

      Thanks for your message and for visiting finder – the leading comparison website & general information service built to give you advice in your buying decision needs. How are you doing today?

      Based on income protection insurance, illnesses and hospitalization are covered. You’d need to refer back to the insurance provider on how to claim and what documents are required.

      Hope this helps! Feel free to message us anytime should you have further questions.

      Cheers,
      Nikki

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