As a self-employed trade professional, you must be healthy to perform your job. Subsequently, every injury you suffer or illness you come down with can result in lost income until you recuperate and can get back to work.
The question is, however, how will you earn an income if you’re afflicted with an injury or illness that leaves you unable to work for an extended period? In this post, we look at income protection policies for sole traders and how income protection for sole trader safeguard your income if you get hurt or sick.
An income protection insurance policy safeguards your monthly income if you find yourself unable to work because illness or injury. Specifically designed for self-employed people registered as sole traders, income protection is available. An sole trader’s income protection policy typically covers up to 70% of a sole trader’s monthly income.
Sole traders need income protection because they don’t receive the same benefits as those employed by a company. When you work for a company, at the very least, you’re entitled to statutory sick pay. Better yet, some employers offer more comprehensive sickness absence pay as part of their benefits package. Some jobs let you use your annual leave if you’re absent for longer than your sick leave entitlement.
As a sole trader, however, you’re not entitled to any of these benefits – and are left to support yourself if you’re unable to work due to illness or injury. Consequently, income protection for sole traders is not only necessary but highly advised.
The most conventional, or traditional, way to protect yourself as a sole trader is to have a large amount of savings. That way, should you not be able to work due to injury or illness, you can use your savings to pay your expenses and/or support your family.
However, the inherent unpredictability of illness and injuries, they may strike before you have the chance to save up a financial buffer. Also, no telling how long you will be unable to work. Worse, with the ever-increasing cost of living, it’s hard to predict how savings will last.
Taking all this into account, the best way to protect yourself as a sole trader is to take out an income protection insurance policy. You can receive a monthly income until you can return to work or reach retirement age. The length of the benefit period determines how long this income will last
The cost of income protection insurance for trade professionals depends on some of the personal characteristics of the individual taking out the policy. This includes:
Additionally, the price of income protection cover is influenced by the sole trader’s insurance requirements, namely:
A self-employed person should buy an insurance policy that suits their situation. It should provide the best support if they can’t work. Keep in mind your monthly benefit will be subject to personal taxes in the event of claim.
The first aspect to consider is the percentage of your monthly income you want to cover. Income protection for sole traders generally covers up to 70% of your income, so the higher your monthly expenses, the higher the proportion of your salary you’ll need to cover. Bear in mind, however, that, generally, the higher the percentage of covered income, the higher the cost of the insurance premiums.
Second, you’ll need to consider your required benefit period, i.e., how long you’ll receive monthly payments in the event you fall ill or suffer an injury. Now, the closer you are to retirement, the shorter your benefit period can be. Conversely, the younger you are, the longer the time before you reach retirement and the longer your potential benefit period.
Thirdly, there’s your waiting period, i.e., how long you’ll have to wait until you start receiving payments. If you have some savings, you can survive a longer waiting period, while if you don’t have some money put aside, you’ll need your monthly payment sooner.
As well as income protection, sole traders should take out public liability and professional indemnity insurance policies.
Public liability insurance provides coverage in case you are accused of negligence while working. This includes situations where someone gets injured or their belongings are damaged. If the individual were to take you to court and win, you’d be liable to pay compensation, damages, and possibly medical fees. Public liability insurance will cover not only those costs but your legal fees as well.
Professional indemnity insurance protects you if a customer sues you for a bad outcome caused by your service. More specifically, if you give them what they deem bad advice– albeit accidentally.
See more: Income protection for tradies
With a skilled team with decades of combined accounting and financial planning experience, K Partners is renowned for helping their clients find the best income protection insurance companies for sole traders in Melbourne, Australia. For impartial advice on sole trader insurance or any other aspect of financial planning, contact us to book your consultation.
Please note that all the while the information provided above is factual in nature, it’s also intended to apply generally, and to a broad audience. Subsequently, the information hasn’t taken your personal circumstances or goals into consideration.