Life Insurance & Income Protection For The Self-Employed

Being self-employed can be rewarding in many ways. However, when you’re running your own business it’s important to factor financial protection and insurance into your plans.

Can you get income protection insurance if you’re self-employed?

Yes. If you are self-employed then you can still apply for income protection insurance. It doesn’t matter if you are a business owner or a contractor. Eligibility requirements vary between insurers but may include minimum working hours and income criteria.

You can generally apply as long as you work in paid employment for a minimum of around 20 hours per week (this may differ between policies). The amount of cover you can take out will vary depending on the policy you select and how much you earn. Typically, income protection insurance can provide regular payments based on a proportion of your earnings (generally up to a maximum level of earnings) if you are unable to work due to illness or injury.

What are the benefits of income protection insurance for the self-employed?

Running your own business can be stressful, but have you considered what would happen if you were unable to work? How would the business be affected, and what difference would it make to your families lifestyle? As a self-employed person or small business owner, you may not be entitled to some of the safety nets that come with working for an external organisation, like sick leave, personal leave or workers’ compensation.

Income protection insurance may help support your financial commitments by providing payments that can assist with covering bills and other outgoings if you’re unable to work. The level of support available will depend on the policy terms, the benefit amount, and your individual circumstances.

Is Business Expense Insurance the same as Income Protection?

You may also have heard of some self-employed people purchasing business expense insurance. This type of insurance is designed to cover certain business expenses (set out in the relevant product disclosure statement) in the event that you are unable to work due to illness or injury and, therefore, serves a different purpose to income protection, as it is designed to cover specific business expenses rather than replace personal income.

Unlike business expense insurance, income protection provides you with a regular income that can be used to cover any costs you may have, including keeping your household going via mortgage or utility payments.

How are income protection premiums calculated if you are self-employed?

Income protection premiums depend on a few factors, including, but not limited to, your age, occupation type and the terms of your cover. For example, income protection can vary in inclusions, exclusions and definitions of disability. The first step in calculating your premiums will be to choose a cover amount which suits your needs.

It can be more challenging to establish a specific income amount for a self-employed person, as this figure can tend to change year on year. Typically, your income is the amount your business earns, minus any costs it incurs, but it's best to check with each insurer as to what they require in terms of information about your business income and what level of cover the insurer can make available to you. Often, insurers will request copies of previous years' tax returns to get a sense of your income.

Where the policy owner is also the insured, income protection premiums may be tax-deductible. Because Tax outcomes can vary based on individual circumstances and applicable regulations, it’s always best to check with a qualified professional.

What should I look for in an income protection policy from Australian providers to cover me for long-term illness or disability?

If you are self-employed, protecting yourself against long-term illness or permanent disability requires more than simply choosing a benefit amount. Policy structure and definitions matter significantly.

When reviewing income protection policies from Australian providers, consider the following elements carefully.

Definition of disability

Different policies define "total disability" and "partial disability" in different ways. Some assess whether you're unable to perform your own occupation, while others assess whether you're unable to work in any occupation reasonably suited to your education, training or experience.

For self-employed professionals, tradespeople or specialists, this distinction can materially affect claim eligibility. An “own occupation” definition generally assesses whether you can perform your own role, while an “any occupation” or education, training and experience test may assess whether you can work in another suitable occupation.

This can be a tougher test to satisfy and may result in a different scope of cover, depending on the policy terms. “Own occupation” definitions will have a higher premium than “any occupation” definitions. “Any occupation” definitions will have a lower premium as the “any occupation” test is more stringent to meet before the policy will pay a benefit.

Benefit period length

If you are concerned about long-term illness, look closely at the benefit period. Options may include:

• Two years
• Five years
• To age 65

A shorter benefit period may reduce premiums, but it might not meet your needs if you’re unable to return to work for a longer time.

Income assessment at claim time (Indemnity cover structure)

Self-employed income can fluctuate from year to year.

Under an indemnity-style income protection policy, the amount payable at claim time is generally based on a proportion of your pre-claim income, supported by financial evidence. If your income changes after you take out your policy, particularly if it reduces, the amount payable may be lower than the amount you originally insured for. It’s a good idea to regularly review whether your cover amount still suits your income and business circumstances.

Partial disability benefits

For business owners, returning to work part time may be possible before full recovery. Partial disability benefits can help by providing a proportion of your benefit if your income drops due to reduced working capacity, supporting a gradual return to work while maintaining some financial stability.

TAL’s Partial Disability benefit, available through Income Protection cover, may provide reduced payments if sickness or injury prevents you from working your usual hours or duties but you can still work in a limited capacity. Payments accrue only after the waiting period and are generally based on the income you’ve lost under the policy terms.

Superannuation contribution options

Some income protection policies may offer a superannuation contribution option, which can make contributions to a nominated super fund while you are receiving an income protection benefit. This option is not always available to self-employed people, so it’s important to check the relevant Product Disclosure Statement or speak with your insurer or financial adviser before relying on this feature.

Managing irregular income as a self-employed person

Unlike salaried employees, self-employed individuals often experience fluctuating income. Seasonal variations, contract timing and business growth phases can all affect earnings.

When applying for income protection, insurers will usually request financial documentation such as:

• Personal tax returns/span>
• Business financial statements
• Notices of assessment/span>
• Profit and loss statements/span>

Because benefits are generally calculated as a percentage of pre-disability income (your income at the time you claim), it is important to understand which income period the insurer uses. Some policies assess average earnings over a defined period, which can smooth out fluctuations. Benefits are generally the lesser of the amount you insure for (your benefit amount), and a percentage of your pre-disability income at the time you claim.

This is why, if your income changes after you take out your policy, you should review your cover and check the relevant PDS or speak with your adviser about whether and how your cover can be increased (or reduced if your income reduces), including whether underwriting would apply for any increases.

Holding income protection inside or outside superannuation

• Allow premiums to be funded from super contributions
• May assist with cash flow management, depending on your circumstances
• Be integrated with other super-held insurance benefits

If premiums are paid from your super balance by rollover, this may reduce your retirement savings over time. If premiums are paid by contributions into your super fund, these contributions may reduce the amount you can otherwise contribute to superannuation due to contribution caps. You should check that holding insurance through super does not inappropriately erode your super balance.

However, there are also other matters to consider when insurance is held inside super. For example:

• Definitions of disability for cover held inside super may differ from insurance held outside super.
• Certain ancillary benefits available outside super (such as any ancillary accommodation benefit, as an example), are not available inside superannuation.
• Tax treatment of super contributions or rollovers used to fund insurance premiums for income protection held inside super should be considered.
• Income protection benefits paid from a super fund are generally taxable to the member. The trustee will typically withhold PAYG tax from benefit payments, and the member may claim a credit for the PAYG tax withheld when lodging their tax return.

Holding income protection outside super may provide broader feature availability and more direct control over policy ownership.

How long-term illness can affect business continuity

For self-employed individuals, illness can also affect business viability.

Consider:

• Ongoing fixed expenses such as rent, utilities and software subscriptions
• Contractual obligations to clients
• Staff wages (if you employ others)
• Reputation and client retention

While income protection is designed to replace personal income, it may not cover business operating costs. If your business relies heavily on your direct involvement, you may wish to assess whether additional insurance products, such as business expense insurance or key person insurance, are appropriate.

How to choose the right income protection policy?

Tips for selecting the right policy, including the benefits and features that matter most

It can be useful to compare income protection insurance before you take out a policy, so you can see whether it may suit your personal circumstances. It’s also important to read the Product Disclosure Statement (PDS) for any policy you’re considering.

Features to consider include:

• The maximum benefit amount – This is how much you will receive on a monthly basis should you need to claim under your policy.
• The waiting period – This is how long you will need to wait between becoming unable to work due to illness or injury and receiving an income protection benefit.
• The benefit period – This is how long you may be able to receive payments for if you are unable to work due to illness or injury.
• Additional features or extras such as recurrent claim, bed confinement or partial disability benefit.
• The application of any offsets which reduce the amount of benefit provided if you receive certain other payments– these will be set out in the Product Disclosure Statement.

Your income protection insurance might be part of a range of life insurance cover that suits your needs, including death cover or total permanent disability insurance.

If you are self-employed and looking for income protection insurance, you can get a quote online to find the level of cover that suits you.

Any financial product advice is general in nature only and does not take into account any person's objectives, financial situation or needs. Before acting on it, the appropriateness of the advice for any person should be considered, having regard to those factors. Persons deciding whether to acquire or continue to hold life insurance issued by TAL should consider the relevant Product Disclosure Statement (PDS). The Target Market Determination (TMD) for the product (where applicable) is also available. Life insurance issued by TAL Life Limited ABN 70 050 109 450 AFSL 237848. No tax advice is provided in this article and you should consider your own situation.