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Most business owners know the importance of insuring their business, but some are not so good at insuring themselves.
As a small business owner there is generally no such thing as sick leave, and that’s what makes income protection insurance so important.
In this guide we’ll run through some key information on income protection for business owners.
How does income protection work?
This form of insurance is designed to replace a large portion of your income if you cannot work for a period of time due to an injury or illness.
Generally the maximum amount of income you can protect is 75%, however this figure can be slightly higher in some situations.
So if your regular income from the business was $10,000 per month, the maximum you could insure would be $7,500 per month. This is known as your benefit amount.
Although you can nominate any benefit amount you choose, it’s important to remember that you will need to be able to prove this income in the event of a claim.
When you take out a policy you can choose from a number of options, with two of the most important being the waiting period and benefit period.
The waiting period relates to how long you must be unable to work for before the benefits commence, and the benefit period relates to how long those benefits will be paid for.
A typical policy may have a waiting period of 30 days and a benefit period of age 65. In the event of a claim, benefits would be earned after 30 days and would be paid until you reached the age of 65 or were able to return to work, whichever came sooner.
Special consideration for business owners
Whilst income protection insurance is generally very straightforward for a typical PAYG worker, it can be a little more complex when it comes to small business owners.
In the event of a claim the insurer will need to see that your personal income is being affected by your inability to work.
We’ll take a look at two different examples to see how this can be an issue depending on your occupation or business type. In both examples the claim is for a broken arm.
Scenario 1 – Carpentry business owner
As a result of the broken arm the carpenter cannot do any work that would generate an income.
He does not employ any staff, and therefore his inability to work means that his income from his business will cease almost immediately.
In this case the income protection claim will be relatively uncomplicated since the loss of income is very straightforward and easy to prove.
Scenario 2 – Retail store owner
Although the store owner has broken her arm, the revenue generated by her business during her recovery will remain relatively unchanged.
There are some duties that she will not be able to undertake, however her staff can take up the slack whilst she undertakes lighter duties.
Overall the business revenue and her personal income from the business will remain unchanged.
Since she is not losing any income as a result of her broken arm, her income protection policy will not pay a claim.
Since income protection can be a little more complex for business owners when compared to employed workers, it’s a good idea to seek professional advice.
There is no point in paying for a policy if you’re not going to be able to claim on it in the way you expected.
A qualified financial adviser, preferably one who has experience with business owners, will be able to ensure that your insurance is structured in the right way to suit you and your business.
Although your income protection policy must be owned by you personally rather than being owned via your company, there are still tax benefits to be had.
All income protection policies, regardless of whether you are self-employed or otherwise, are 100% tax deductable.
For more information about the tax treatment of income protection we recommend that you speak with your accountant.
As mentioned earlier, it is highly recommended that business owners and self-employed workers seek professional advice from a financial adviser before taking out a policy.
We can assist with quotes and advice on income protection and other forms of personal risk insurance.
Simply call our office on 1300 542 245 or complete our online quote request form.