Income protection for the self-employed

Self-employed workers can take out income protection insurance, but you may have to meet some specific criteria to be eligible for cover. For example, insurance providers may require you to have been continuously self-employed for a specified timeframe and work a certain number of hours per week before taking out cover.

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.

How your income is calculated when you’re self-employed differs between insurers. Generally, your level of cover is calculated based on your share of the business’ profits from your personal effort minus the business expenses involved in making that income. To prove this, you’ll often have to provide your insurer with a copy of your financial statements such as your tax returns and profit and loss statements before they will cover you.

Since March 2020, all income protection policies are indemnity value policies. This means that your income is assessed when you make a claim, not when you take out your policy. This is usually done by taking an average of your income over the 12 months prior to making a claim. However, this will differ between insurers, so for the exact definition of how your insurer calculates your benefit amount, make sure you refer to the relevant Product Disclosure Statement (PDS).

It’s possible to have an income protection policy bundled in your super fund. When it comes to income protection through superannuation, it’s important to note that the premiums are taken from your super balance; if you’re self-employed, you need to organise your own super contributions. If you don’t make super contributions, you could be left with less money for your retirement.

There are some further pros and cons to consider. While premiums may be relatively affordable for income protection through super, the cover and features you have access to might be limited. If your super is through a super fund, claims may take longer to process since the fund trustee needs to be part of the claim approval process. You also won’t be able to claim a tax deduction for your income protection premiums if your policy is through your super fund and your premiums are deducted from your contributions.

It’s important to ensure that the payout you’d receive from your income protection policy is enough to cover your regular household expenses. To get an idea of the right level of cover for you, look at your current regular income and compare it to your household expenses. If you’re self-employed, it can be hard to determine your regular income, so you may want to consider consulting with a financial adviser.

If you couldn’t manage your expenses with 70% of your regular income, it might also be worth considering a life, trauma or total and permanent disability insurance policy that could pay a lump sum amount if something happened to you if the terms and conditions of those separate policies are met.

Yes, there are some occupations that are considered too risky for insurance companies to provide any income protection. This can be either because they are hazardous jobs and have a higher risk of injury, or the role typically experiences fluctuating income that is hard to predict.

Some examples of jobs that are risky for insurance companies to provide income protection for may include roles such as:

• Commercial fishermen
• Construction workers and tree loppers
• Miners
• Roles involving contact with harmful substances.

Note: Different insurers may not cover different occupation types. For more details on whether your occupation is covered, refer to your potential insurer.

The cost of your income protection insurance premiums will be based on a number of factors, including:

• Whether you smoke
• Your pastimes
• Your health and lifestyle
• Family medical history
• Your occupation
• Your gender and age
• Your gross annual income.

These are only a few examples of possible factors involved in calculating your premiums. For further information on how your insurer calculates your premiums, refer to the applicable PDS.