Income protection for sole traders

 

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 they safeguard your income if you get hurt or sick. 

What is income protection?

An income protection insurance policy safeguards your monthly income if you find yourself unable to work due to illness or injury. Income protection for sole traders is specifically designed for self-employed people registered as sole traders. An income protection policy typically covers up to 70% of a sole trader’s monthly income.

Why do sole traders need income protection?

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. Furthermore, some jobs will allow you to draw from your annual leave allowance if your absence is in excess of your entitled sick leave. 

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. 

How do you protect yourself as a sole trader?

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. This can (depending on the benefit period) provide you with a monthly income until you’re able to return to work or reach retirement age. 

How much is income protection insurance for sole traders?

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:

• Income 
• Percentage of income you want to cover
• Profession 
• Age
• Gender
• If you smoke

Additionally, the price of income protection cover is influenced by the sole trader’s insurance requirements, namely:

• Length of benefit period, i.e., how long you’ll receive payments for
• Waiting period, i.e., how long until you start receiving payments.

What income protection should sole traders buy?

A sole trader should purchase an income protection insurance policy that reflects their individual circumstances – and, more specifically, that best takes care of their needs if they’re unable to 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.

What types of insurance are required by a sole trader?

As well as income protection, sole traders should take out public liability and professional indemnity insurance policies. 

Public liability insurance protects you in the event you’re accused of negligence during the course of your work, e.g., someone is injured or their property is 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, on the other hand, protects you if you’re sued by a customer or client for providing them with a service that then results in a negative outcome. More specifically, if you give them what they deem bad advice– albeit accidentally.   

Where to find the best income protection insurance for sole traders?

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.