Effie Zahos
Smarter Writer

Effie Zahos is editor of <i>Money </i>magazine and has over 22 years' experience in the finance industry.

Effie Zahos
Smarter Writer

Effie Zahos is editor of <i>Money </i>magazine and has over 22 years' experience in the finance industry.

If you are self-employed and unsure about income protection insurance, read on. Effie Zahos reveals some of the options.

Your ability to earn an income is your most valuable asset and the cost of protecting it isn’t as expensive as you may think.

A 37-year-old plumber who earns $80,000 a year takes out income protection insurance to cover his income and a business expense policy to cover $5000 of his fixed business expenses in case he is sick and unable to work. His total premium before tax is $3062. But, because his premiums are tax-deductible, his after-tax premium reduces by 34.5% (his marginal tax rate, including the Medicare levy) to $2006.

“His premiums are the equivalent of a take-away pizza and a six-pack of beer each week,” says Russell Cain, CEO of insurance comparison site lifeinsurancedirect.com.au.

protect thumbs up illustration

Despite the affordability, research from the Insurance Council of Australia shows cost is often a barrier to purchasing.

“SMEs need to think about the sort of money they’d lose if they couldn’t work for a few months, or worse if they could never work again,” says Cain. “It certainly helps put the cost of income protection insurance into perspective. Unlike employees, the self-employed don’t have any sick leave or annual leave entitlements that they can fall back on should they suffer a sickness or accident and require time off work.

Consider an income protection policy with an appropriate waiting period.”

His premiums are the equivalent of a take-away pizza and a six-pack of beer each week.

- Russel Cain, lifeinsurancedirect.com.au

You can insure your business revenue through a combination of ordinary income protection insurance and business expenses insurance. Business expenses insurance provides cover for 100 per cent of fixed ongoing business expenses like rent, utilities, leases and salaries.  Income protection provides cover for up to 75 per cent of your salary.

There can be big differences in the costs and terms for income protection. For example, some provide a benefit of up to five years if you’re unable to work, while others provide a benefit until you turn 60 or 65.

When choosing income protection insurance, you should focus on the waiting period (often 30 to 90 days), benefit period and monthly benefit. The longer you’re prepared to wait, the cheaper the premium, but of course you must have savings to fund the gap.

Andrew Kennedy, manager of business advisory at HLB Mann Judd in Sydney, says: “Many self-employed individuals assume they’re covered under business interruption insurance (like fire and theft) or only take out income protection insurance, which results in them having to use their insurance benefit to meet continuing business costs.

“You can buy income protection and business expenses insurance directly, and/or by holding part of the income protection cover inside your super (where only the premiums payable on the cover held outside super are tax deductible),” Kennedy points out.

Agreed value policies tend to be more expensive as the benefit payable is designed to reflect your income at the start of your policy. Indemnity value policies offered through super funds usually verify your income at the time of making a claim.

When it comes to choosing a policy, Cain suggests considering flexibility around your disablement definition (duties-based, income-based or hours-based) and one that can provide you with an agreed value monthly benefit or an indemnity policy. This can be of benefit at claim time when you need to prove your income. 

Income protection tips and traps:

  1. Consider a policy with index-linked premiums and cover to match inflation.
  2. Look for a non-cancellable policy; otherwise companies may reassess your health or other factors on each renewal, possibly raising your premiums or refusing to continue cover.
  3. Find a policy with guaranteed future insurability; a benefit that allows you to increase your level of cover without further underwriting. This is important if your circumstances change.
  4. Consider policies that pay only if you’re unable to perform your occupation. Some only pay if you can’t perform any occupation for which you’re suited.

Source: Income Protection Insurance / choice.com.au at bit.ly/1LnUqPv 

Telstra has provided you with access to a range of articles and information which may be of interest to you and your business. The content of our articles does not constitute the provision of financial or taxation advice, and we strongly encourage you to seek independent professional advice or consider for yourself if this information is appropriate for you and your circumstances.

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