Sole trader income protection insurance

Income protection for sole traders provides financial support, via a monthly payment, if you’re unable to work due to illness or injury.

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Nicola Middlemiss

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Key takeaways

  • Covers a percentage of your pre-tax income if you can't work due to illness or injury.
  • Seen as an alternative to workers' compensation, which sole traders aren't eligible for.
  • Can be tailored to your specific preferences, including waiting periods and benefits.

Do sole traders need income protection insurance?

Income protection insurance isn't a legal requirement, but it's definitely worth considering - especially if you would struggle financially if you were suddenly without your income.

As a sole trader, you're not eligible for workers' compensation and income protection insurance is often seen as an effective alternative. However, income protection is more comprehensive than workers' compensation, as you would be covered whether you were injured at work, or outside of work.

Pros and cons of income protection for sole traders

Pros

  • A financial safety net if you ever need to be off work for health reasons.
  • Any premiums you pay for income protection are tax-deductible.
  • Flexible policies allow you to tailor your cover to suit your specific needs.

Cons

  • Policies typically get more expensive as you age, and most aren't available to over 60s.
  • Usually, you won't receive your first payment until a month after your waiting period.
  • You may have to pay more if you work in a high risk profession.

Sole trader income protection insurance eligibility

To be eligible for income protection insurance, you'll have to meet a minimum income or working hours requirements, which vary between insurers. You may also have to prove that your income is relatively stable. There are also age and residence requirements with most brands only offering cover to citizens or residents aged 18-60.

How are premiums calculated for sole traders?

The cost of income protection for sole traders is calculated based on several factors, including age, occupation risk, health status, lifestyle, income, insurance benefit, and waiting period. If your income is variable, insurers may average income over several years to determine the payout amount.

How to buy income protection as a sole trader

There are a few different ways you can buy income protection as a sole trader, including:

  • Direct: Buy your policy directly from an insurer, online or over the phone.
  • Through a broker: Engage an insurance broker for more tailored coverage.
  • Superannuation: You can get income protection through your super fund, with premiums deducted from your super balance.

How to calculate your income protection needs as a sole trader

Income protection insurance is highly customisable and you can choose what percentage of your income you'd like covered - within the parameters given by the insurer. Consider these factors when calculating your needs:

  • Expenses: Identify unavoidable monthly outgoings, such as rent, utilities, and loan repayments.
  • Income: Determine what percentage of your earnings are spent on these critical expenses.
  • Savings: Consider other income streams or savings that could cover some of your expenses.
  • Supports: Consider other possible financial supports including your partner, or family.
  • Waiting period: Think about how long you could cover expenses without your regular income.

FAQs

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Journalist

Nicola Middlemiss is a journalist with nearly a decade of experience in personal finance and insurance. She has contributed to Domain, Yahoo Finance, Money Magazine and Insurance Business Australia, offering in-depth insights into commercial insurance in the Australian market. Nicola holds a Bachelor’s degree in English from the University of Leeds and a Tier 1 General Insurance (General Advice) certification, which complies with ASIC standards. See full bio

Nicola's expertise
Nicola has written 250 Finder guides across topics including:
  • Personal finance
  • Personal insurance, including car, health, home, life, pet and travel insurance
  • Commercial business insurance
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