Income protection insurance for contractors

Many Australians are underinsured when it comes to categories like income protection. Tradespeople and those who are self-employed in particular may be more at risk of experiencing financial stress if they are not protected against the potential loss of future income.

If you’re a small business owner, tradesperson or a self-employed worker, have you thought about what would happen if you weren’t able to work for an extended period due to a sickness or injury? If you haven’t, it may be time to consider a form of financial protection such as income protection insurance.

An introduction to income protection insurance 

If you can’t work for a period of time due to being sick or injured, income protection insurance provides you with a regular income (your benefit amount) for a certain period of time.

For instance, Real Income Protection Insurance provides monthly payments of up to 70% of your pre-tax income, up to $15,000 a month. As an example, if you earn $5,000 per month as your personal income as someone who is self-employed or an employee – and are injured and unable to work for several months – you could be eligible to receive up to $3,500 per month, depending on your policy and circumstances. 

Pre-tax income refers to the total renumeration or income you receive through personal exertion. The definition of pre-tax income varies depending on whether you are an employee or self-employed. 

If you are an employee – your pre-tax income would include your salary (excluding superannuation) and any regular bonuses or commissions you earned. However, if you are self-employed, your pre-tax income is your total share of income earned in the business as a direct result of your personal efforts, minus any business expenses and superannuation contributions.  

The income benefit you receive can be used however you wish such as making payments to help you keep your business afloat and covering your personal expenses, including rent, and groceries. Keep in mind the portion covered is the loss of your share of income from personal exertion, meaning that if your self-employed, and your business continues operating in some manner, your cover under your policy will be for the direct loss of income that your injury has caused only. 

It’s worth noting that a waiting period before you can make a claim, and a maximum benefit period (how long you will receive your benefit for) usually applies.

You may be able to increase or decrease your level of cover (benefit amount) depending on your insurer, and with a direct policy you can generally deduct your premiums from your taxable income during tax time. However, it is best you seek the advice of a professional to understand if this applies to your situation.

Benefits for business owners, the self-employed, and contractors 

Income protection insurance offers numerous advantages for anyone who relies on a regular wage. However, it could be particularly worth considering for business owners who pay themselves a wage for their efforts, those who are self-employed, and contractors.

1. Critical role in business 

As a self-employed person, you most likely play a critical role in delivering your business projects on time. If you’re the only worker, and unable to work for an extended period of time, this may affect both your ability to pay your personal costs and the business costs. 

2. No cover under worker’s compensation 

If you’re a business owner, self-employed worker or an independent contractor, you may not be covered by worker’s compensation. However, it’s important to note that in some cases contractors can be covered as workers, depending on state/territory regulations.

If you aren’t covered under worker’s compensation and you get injured at work, you wouldn’t be able to claim for things like compensation for wages when you’re not fit for work or for medical expenses and rehabilitation. This could leave self-employed workers particularly vulnerable to loss of income and financial hardship if they were to become injured or sick.

Bear in mind if you do have workers compensation and are claiming for an injury at work, any workers compensation that relates to loss of work (or any other disability payments) would reduce the income benefit payable under an income protection policy. 

3. More people are part-time or temporary workers    

In the last few years, the way people work has changed, with more people relying on temporary jobs and part-time contracts for their income. This means having income protection insurance could be more important than ever to consider.

Income protection insurance can protect part-time workers as long as they satisfy a minimum number of 15 working hours per week (depending on the insurer).  

4. Universal cover 

Income protection insurance provides cover for sickness and injury that occurs both at-work and out-of-work. Even if you’re travelling interstate or overseas for work or for personal reasons, you may still be covered if you’re injured or get sick and can’t work. 

Safeguard your income

By having income protection insurance, you’re taking steps to safeguard your financial situation from the unexpected. Find out more about Real Income Protection Insurance