Self-employed? How to protect your income

When we first met Alan, he had just set up his own printing business in his garage and was earning a moderate income. 

After borrowing to finance his equipment and start-up costs, it dawned on Alan that if he were unable to work, he could find himself in serious financial difficulty.

We pointed out a simple solution – Income Protection (IP), insurance that provides a replacement income for a set period of time if he was injured or become seriously ill. But determining how much to insure Alan for was the hard part – particularly for a start-up with no financial history. 

We looked at the two options:

• Agreed value: the insurer agrees to a benefit amount upfront and the premium is calculated accordingly. This method usually requires two years of financials, particularly if you’re self-employed – difficult for start-ups.
• Indemnity: financials are unnecessary at the time you take out the policy, but in the event of a claim, evidence of income is required to determine the benefit amount. The benefit is paid on the amount you earn at that time – important if your income has reduced.

Then discussed two potential Income Protection strategies to meet Alan’s needs:

1. Agreed value cover to, say, half of Alan’s projected income, for twelve months with a review after that time. The advantage is in knowing what the payout will be.
2. Indemnity cover, although the insurer will likely insert a clause disregarding income earned prior to starting the new business. 

In the end, Alan decided to take out an indemnity policy and his accountant advised that his premiums were tax deductible!

Alan asked us about Key Person insurance. I explained that this covers the costs associated with the continuation of the business should an integral employee dies or is no longer able to work. As Alan had no rent or wages costs, it was not really relevant for him at that stage but as he was proving to be a born-salesman, we decided to revisit it down the track as the business grew. 

With good advice and an understanding of his needs, we had Alan’s financial concerns covered. He was able to relax and get on with doing what he did best, growing his business.

Since then, Alan has taken on several employees and moved to commercial premises. Every year, we review his position and update his strategy, which now includes Key Person cover, ensuring he and his business continues to be protected now, and into the future.

According to the Australian Bureau of Statistics, the most active businesses in Australia in June 2014 were unincorporated home-operated businesses. 

If you’ve recently taken the self-employment leap or are thinking about it, give Jeff, our insurance specialist a call on (02) 6583 7588 so together we can make sure you and your business are protected.