What Is Income Protection Insurance & Do Sole Traders Need It?

As a sole trader, you’re an expert in your craft. You rely on yourself to get the job done. 

But you also need to be covered for potential hurdles and hardships, which is why most sole traders will have coverage, such as public liability and professional indemnity insurance, to ensure they’re protected in case things go wrong. 

Income protection insurance is also incredibly important if you’re a sole trader, but you might not have considered it before. In this article, we’ll explore what income protection insurance is and the benefits for sole traders of this particular type of insurance cover.

What is income protection insurance?

Like any insurance, income protection covers you in case of unexpected events. You can purchase a policy and pay annual or monthly instalments called premiums, in return for covering your income in case you can’t work for a number of reasons. In most cases, this cover is for unexpected illness, severe injury or other circumstances that prevent you from working at your full capacity.

Most policies will cover you for a certain percentage of your monthly income, allowing you to maintain cash flow to meet expenses such as bills, housing costs, groceries, and the overall cost of living. 

Why sole traders need income protection

Unlike a waged or salaried employee, who is entitled to a range of benefits including sick leave, annual leave, carers leave and superannuation, a sole trader has to save a portion of their income to allow a buffer for these times. And that’s not always possible, with spiralling costs of living and other expenses to meet, such as school fees, medications, pet costs and unexpected accidents or costly repairs. 

With income protection insurance, you are covered in case something happens that prevents you from earning your usual income. As you don’t have the same benefits or security as a salaried employee, you’ll need to rely on any savings you might have, as well as the insurance cover that will provide a payout. 

We’ll take a look at some of the circumstances when income protection for sole traders can be a huge benefit.

1. In case of illness or injury

You might find yourself suddenly ill with a serious disease or disorder, or a chronic health or immuno-compromising condition. If you need to take time off to undergo treatment and throughout the recovery process, income protection will cover your expenses while you rest and recuperate. The same applies to a major injury that prevents you from working, such as a broken bone, torn muscle or ligament, or serious sprain. 

As some sole traders are tradespeople with physically demanding jobs, illness or injury is a real risk and can be a major setback that stops you from working altogether. At least with income protection cover, you’re safe in the knowledge that you can meet basic expenses – should the unexpected occur.

2. For mental health issues

Not all illness is physical, and some income protection policies will cover you if you’re unable to work due to mental health illness. That could include clinical depression, an anxiety disorder or a condition such as bipolar disorder or schizophrenia. These conditions can come on rapidly, although there are certain lifestyle and genetic factors that can make you predisposed to developing a mental illness.

While many people can work and remain productive despite their mental health challenges, sometimes it gets to the point where you can’t work at the same level you usually can. In this case, having income protection insurance that covers mental illness serves the same function as if you’d fallen ill or suffered a physical injury.

3.  If you have scheduled surgery coming up

Another reason sole traders need income protection insurance is if they need to pause business to undergo major surgery to treat an illness or injury.

Often, you’ll need time off before and after the procedure to prepare for the operation and then to rest and recuperate. This can mean a month away from your sole trader enterprise, and sometimes even longer. Again, with an income protection insurance policy, your income is covered for this period, allowing you to meet all the costs of living despite your time off. 

Income protection covers your income, not business income

It’s important to note the distinction between your income from the business and your total business income. 

For instance, you’ll draw a wage from your sole trader enterprise: this is your income. An income protection policy covers this, but not the overall income of your business. 

It will be calculated as a percentage of your taxable income that you draw from the business. So if you pay yourself $2,000 a fortnight, but the business makes $3,000 a fortnight and the rest goes on overheads, you will only receive a percentage of what you earn, not the entire sum. 

Income protection for sole traders: in conclusion

As a sole trader, ensuring your income is protected in the case of unavoidable or unexpected accidents is essential. That’s why this type of insurance should be considered to protect you as an individual, alongside those you take out to run your business. You never know when you might fall ill or suffer an injury, so paying for peace of mind and to guarantee your income is worth consideration if you’re a sole trader.