Income protection insurance for the self-employed FAQs

Questions you might have about income protection insurance if you're self-employed.

1. I'm self-employed. Can I get income protection insurance?

Income protection insurance is available to self-employed individuals just like it is available to employees. In fact, income protection insurance can be even more important for self-employed people, as they don't have the safety net of sick leave or other employee benefits.

To apply for income protection insurance, you will need to provide proof of your income, such as tax returns or bank statements. The amount of cover you can get will depend on your income and the policy you choose. It's important to note that there may be some differences in the types of policies available depending on your occupation, but most insurers offer income protection for self-employed people.

It’s important to note that income protection covers your income, not the income of your business. If you own and run a business, you may wish to consider business expense insurance to help pay for your business fixed expenses and maintain your operation if something happens to your business.

2. Why do I need income protection insurance?

One of the challenges of self-employment is the lack of paid sick leave and workers' compensation entitlements.  

If you're forced to take time off work because of illness or injury, you may struggle to pay for everyday expenses such as your mortgage, rent, groceries or school fees. Income protection insurance provides you with regular payments to help meet these expenses.

3. I'm a self-employed contract worker. Can I still get income protection?

Generally, yes you can! Like others, you may have to meet certain requirements such as proving continuous employment for a specific amount of time and hours of work per week worked. Usually this is a minimum of 20 hours. But being a self-employed contractor is not a barrier to taking out income protection insurance.

While your premium will vary depending on what industry you’re working as a contractor in, you should be able to insure your income.

4. What is considered income for a self-employed person?

It's the amount your business is paid minus the costs and expenses of generating that income. For example, your business may have been paid $200,000 over a financial year, but after taking the expenses or costs of $70,000 incurred to do the work the remaining $130,000 is counted as your income.  In this instance you could not apply for cover to replace an income of $200,00 per year – you would apply for cover to replace your income based on $130,000.

It's typically only after submitting their tax return that a self-employed individual has an exact figure for what their income was over the last financial year. 

This is why insurers and financial institutions ask to see a couple of tax returns before providing a service to business owners.

5. Is my premium tax deductible?

In some circumstances – yes. If your policy sits outside of your super fund, you may be entitled.  The Australian Taxation Office (ATO) states that if you take out a policy from an approved Australian provider, you can claim the cost of premiums you pay for insurance against the loss of your income. 

However, you should seek tax advice that is specific to your personal circumstances from a tax adviser or registered tax agent before assuming you will be able to make a tax deduction.

6. What if my income changes?

You can increase or decrease your amount of income protection cover at any time if your earnings rise or fall. To increase your income cover, you usually need to confirm:

• your occupation, employment status and number of hours worked each week
• your new income
• your health status

If you reduce your amount of cover, benefit period or increase your waiting period, you may not be able to reverse these at a later date.

7. What's the difference between an indemnity and agreed value policy?

Most self-employed people find their income fluctuates from one financial year to the next.

This can be due to external factors, such as the industry they are a part of booming or busting. It can also result from individual choices, such as taking six months maternity or paternity leave.

Let's say you're currently earning $100,000 per year and take out an agreed value policy based on 70 per cent of that income. If anything does go wrong in the future, you will be paid $70,000 a year. 

However, if you go for an indemnity policy, any future payout will be based on the highest average income what you’ve earned in any 12 months during the previous two financial years. If you've earned $100,000 or more in 12 months, you'll still be paid $70,000 a year. But if you've averaged an income of only $50,000 a year, you would be paid only $35,000. 

It should be noted that if your income increases your payout does not automatically increase as well. Your maximum payout will be determined by the benefit amount. 

If your income does increase significantly in the following years, you may wish to adjust your agreed value or indemnity policy to reflect your changed circumstances.

8. I'm a small business owner, are there any other special things I need to consider?

You may want to look into other forms of insurance to make sure you’re covered if things other than your health go awry. These could include: 

• professional indemnity insurance if you provide a professional service
• product liability insurance if you sell products 
• tool insurance if you’ll need to quickly replace vital equipment in the event of theft or damage. 
• Life insurance which can provide a lump sum payment if you die or are diagnosed as terminally ill. Commitments like your business, mortgage, school fees for the kids and other debts can be covered under life insurance.

Speak to an insurance professional for assistance in what insurances might be appropriate for you and your business.

9. How much do income protection premiums cost?

This depends on several factors such as your age, job, current health and how long you want to receive benefits should you need to claim. To figure out how much income protection you need add up monthly household expenses including debt repayments, groceries, bills, school fees and the like and you'll have an idea of how much you’ll need to be paid at claim time.