Income Protection for the Self Employed
Income protection should be looked on as being equally as important as life insurance for if something were to occur where you were unable to earn your income how long do you consider you could financially survive before everything came falling down around you.
Many employees have workers compensation and superannuation funds that will give some measure of protection however self employed people including contractors and sub-contractors, whose numbers are growing by the day, have absolutely nothing to fall back on if they haven’t gone to the trouble to have themselves covered for loss of income.
To make matters worse it is accepted that most self-employed people don’t have any sick leave, maternity leave, holiday leave or long service leave that employed people take for granted. All this means that if they take ill or become injured to such an extent that they can not work for any extended period of time they have no other option than to fall back on Centrelink to claim either unemployment benefits or a disability pension in order to survive. Self employed people have to build their own safety net around them and this means taking out life insurance that has a built in disability clause as well as ensuring they have adequate income protection.
A small business with only the one owner such as a sole trader, or with just one or two employees, could go out of business in a very short time if there was no one there to bring in enough money to pay the bills and usual living expenses. Even though you may not have an income coming in, through no fault of your own, your bills will still accumulate, your rent or mortgage will still need to be met, your car repayments will not stop coming in, nobody will be there to pay your credit card minimum payments for you and you will struggle to put food on the table. How long do you think your family could hold out under such conditions?
It’s just not worth the risk. Therefore where you would not leave your family to suffer the consequences should you happen to die by not having sufficient life insurance, neither should you leave them exposed to the situation that would take place if you were not able to continue bringing in a regular income.
Income Protection Can provide 75 Percent of Your Usual Income
Income protection insurance can provide you with up to 75 percent of your usual income should you suffer an illness or injury that prevents you from carrying out your usual occupation after an agreed waiting period has expired. The payment you receive can be arranged to last for any period of your choosing or until you have recovered enough to be able to resume working again. You can arrange cover that will have you continuing to receive compensation until retirement if your injury or illness was such that no recovery ever occurred.
Most income protection insurance policy payments are based on your before tax gross income after deductions are made for trading expenses during the 12 months before you made your claim. Some policies are based on the best year experienced out of the last three years. This allows for the highly fluctuating incomes enjoyed by many self employed people.
When you take out your income protection insurance it will be a good time to contemplate taking out business expenses insurance as well. This will ensure that when you have recovered from your illness or injury, your business has survived too. Business expenses insurance covers such things as your fixed business costs for a period of 12 months. These expenses can include such things as the following:
- Employee salaries (those not involved in sales).
- Regular advertising costs.
- Telephone charges.
- Business property municipal rates and taxes.
- Costs of utilities such as power, water and gas.
- Rent payments or interest on mortgage loans.
- Business insurances.
- Motor vehicle leases and plant hire.
Matters to be Aware of
When looking at taking out income protection insurance there are certain matters that are important to take notice of such as the definition of occupation. Some policies will cover you for as long as you are unable to work in the occupation you trained for. Others will cover you only while you can’t do any kind of work. As soon as you are able to work at anything your cover will cease.
All have a waiting period of some length before you are able to make a claim. This will have a big impact on the premium you will be charged but it will ultimately depend on how long you think you can afford to wait without an income before being able to claim for relief. Another factor will be how long you consider you will want the payment to continue for. You can take out the policy so that you only receive payments for 12 months. However you might prefer to be covered until retirement, just in case. Once again it will depend on how much you are willing to pay.
Another big factor to consider will be what the policy defines as a disability. This will probably depend on the type of occupation you are in but make sure you are actually covered for the types of disabilities most likely to be met in your type of occupation. Also find out whether you will still receive benefit payments if you only lose part of your usual income.
Life insurance and income protection insurance are very worthwhile personal insurances that can be of great value to your family if something was to happen to you. The loss of your life can obviously devastate your family in many ways, not in the least financially, but you losing your ability to earn an income can also place your family in a downward spiral that could easily lead to poverty if the risk is allowed to remain unattended to.
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