Being a sole trader provides you with a range of rewards such as the freedom to run your business as you like and the satisfaction of knowing you are your own boss. On the flip side, you are also responsible for covering your back if the unexpected happens. Getting injured or falling ill can mean you're unable to work which can have a huge impact on your overall business. Injuring someone else, on the other hand, or damaging someone's property could cause a big financial blow that can be difficult to bounce back from.
Like any business, sole traders need a variety of insurances to protect themselves and their livelihood. Options include public liability insurance, business protection and personal insurances such as income protection or personal accident insurance.
Income protection
Can provide you with a much needed safety net (through a lump sum or regular payment) when you're unable to work due to illness or injury.
Business protection
Cover for your tools and equipment, professional indemnity to protect against third-party claims and workers compensation if you have any employees.
Public liability
Covers you against third party risks such as injuring someone else on the job or damaging someone's property.
Personal injury and illness
Being out of work for a few days due to injury or illness mightn't cause too much disruption to your business but what happens if those few days turn into months or even years? Sole traders have a variety of insurance products to choose from to protect against lost wages and to help make ends meet until you're back on your feet.
- Income protection (IP) provides up to 75% of your income as a regular cash sum if you are ill or injured and unable to work. Income protection has a fixed length of time to receive benefits, usually between 2 and 5 years, but some providers offer a benefit period until the age of 65.
- Personal accident insurance is an alternative to income protection that only covers accidental injury and not illness. You may choose personal accident cover if you don't qualify for IP insurance or if you're looking for a cheaper option.
- Total and permanent disability insurance kicks in if you suffer a permanent illness or injury and are no longer able to work. You'll receive a lump sum benefit to help replace income and cover ongoing debts, bills and medical expenses that you'd struggle to pay if you can no longer work.
Business protection insurance
As a sole trader, it's a good idea to consider your business activities and decide what type of business insurance is right for you. Depending on the size and scale of your operation, you may need multiple forms of cover to protect the different parts of your business. You may also be able to bundle two or more of your policies together with the right kind of business insurance.
Here are some examples of business insurance available:
- Professional indemnity covers any potential costs that come as a result of workplace mistakes due to a specialist service or expert advice you provide. For eg. If a client falsely accuses you of shoddy work, professional indemnity would cover the cost of legal fees, investigation and any compensation due.
- Tools insurance is designed to protect your work tools and equipment against theft or damage.
- Commercial property insurance is needed if your business has a physical location. It's similar to home insurance but it protects the building that a business operates from.
- Business interruption insurance can help if you need to shut down your business or scale back for a while due to a catastrophic event or major disaster.
Public liability insurance
Public liability insurance covers your legal fees and any compensation costs if a third party sues you for property damage or injury due to an alleged negligent business activity.
While it might not seem necessary if you have little contact with clients, suppliers or members of the public while at work (e.g. a graphic designer who works from home), public liability insurance could mean the difference between you paying tens or hundreds of thousands out of pocket in a stressful legal case.
- Will cover what you owe the person suing you plus any legal fees
- Maximum level of cover ranges from $5-$20 million
- Includes cover for you, your employees and business partners
- Some policies include product liability cover for damage or injury caused by your products
- Provides cover for expenses incurred if you administer first aid to another party at the time of an injury
Unlike most workers in Australia, sole traders are not eligible for workers' compensation. This is because you must be employed by another person or company to be eligible and as a sole trader, you're technically considered an employer and not an employee.
This leaves you with a gap in coverage if you are ever unable to work due to illness or injury. While it's not a legal requirement for you to have personal accident or injury insurance, you may want to consider an income protection or personal accident policy.
Workers compensation vs work arrangement
| Employee | Yes | Income protection for extra protection |
| Sole trader | Only for your employees | Income protection or personal accident insurance to fill the gap of workers compensation
Workers compensation for your employees |
| Contractor | Yes (if you are considered a worker under state legislation) | Income protection if not eligible for workers compensation or personal accident insurance |
You will need to provide cover for your employees
It's worth pointing out that if you are a sole trader, you will need to have adequate work cover in place for any of your employees.
When considering sole trader insurance there are a few important factors to look at:
- Waiting period. The waiting period determines how long you will have to wait to receive a benefit after you make a claim and can be anywhere from 14 days to 12 months. The shorter the waiting period the higher your premium.
- Features and Limitations. No two policies are the same. Make sure you understand the features and limitations of your policy. Take note of how things are defined to avoid any misunderstanding and disappointment when making a claim.
- Flexibility. Another important factor that you might want to check is how flexible your policy is, make sure it increases with CPI to avoid being underinsured.
- Eligibility. There is usually an age limit between 18 and 75 for personal accident and up to 64 for income protection. You'll also need to either be a citizen or considered a permanent resident of Australia.
This is perhaps one of the most common questions people have. While the answer to this question varies from person to person, you can calculate your needs by asking yourself:
- Do you have funds you can readily access? Having some savings only apportioned to your business can provide you with a much needed safety-net and mean that you don't require as much cover as someone who is devoid of savings.
- Do you have plans to expand your business? If you're planning on expanding your business at any time in the future, you need to ensure that your company can continue to grow without you at the helm.
- Do you have loans or debts? While sole trader insurance is for protection of your business' fixed costs, it can also lessen the financial strain for you in times of need. It will allow you to continue to pay your ongoing business expenses.
Sole trader insurance gives you the assurance of being able to continue your business even if you fall into hard times. Why risk losing it all when you can have something to protect your lifelong investment with sole trader insurance?
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