Self-Employed Life Insurance: Am I Eligible?

Life insurance is a crucial consideration for everyone, but it can be especially important for those who are self-employed. When you're self-employed, you may not have the same safety nets as traditional employees, such as sick leave, personal leave, or workers' compensation. This means that if you're unable to work due to illness or injury, you could quickly face financial difficulties. Life insurance can provide a financial buffer during these challenging times, ensuring that you can continue to meet your living expenses and support your family. It can also help cover additional business-related costs, such as accountant and lawyer fees, taxes, and employee salaries. However, it's important to carefully consider the type of life insurance policy you choose, as the coverage and benefits can vary significantly.

Income protection insurance for self-employed

Yes, self-employed people can get life insurance. In fact, it is even more important for self-employed people to have life insurance, as they do not have the same safety nets as those working for an external organisation, such as sick pay and workers' compensation.

Income protection insurance is often included in life insurance policies but can also be taken out separately. This type of insurance replaces a portion of your income (up to 85% according to ASIC) if you are unable to work due to illness or injury.

Policy Types

There are two types of income protection policies: indemnity value and agreed value. An indemnity value policy covers a percentage of your annual salary at the time of your claim, so if your salary has decreased since you bought the policy, your monthly insurance payment will be smaller. An agreed value policy is usually more expensive, but you agree on the insured amount when taking out the policy, so your payments won't change if your income drops.

Monthly Payments

Income protection insurance usually provides monthly payments, like a salary, for an agreed-upon time, normally until retirement age. Qualifying for these payments depends on the definition of partial or total disability in your insurance policy.

Waiting Periods

The waiting period, or elimination period, is the amount of time after you are disabled until you can start receiving benefits. Waiting periods can be as little as zero to two weeks for short-term disability insurance or several weeks to several months for long-term disability insurance.

Benefit Period

The benefit period is how long you may be able to receive payments if you are unable to work. Short-term disability insurance usually has a benefit period of up to two years, while long-term disability insurance can last from a few years to retirement.

Additional Considerations

When choosing an income protection policy, it is important to compare different options to ensure you get the cover you need. Check the maximum benefit amount, waiting period, benefit period, and any additional features or extras such as recurrent claim or partial disability benefit. The application of any offsets that reduce the benefit amount if you receive other payments will be set out in the Product Disclosure Statement (PDS).

Additionally, income protection insurance premiums may be tax-deductible, so it is worth checking with your accountant.

Life insurance for self-employed freelancers

Life insurance is a crucial consideration for self-employed freelancers. As a freelancer, you may not have the same safety nets as traditional employees, such as sick leave, personal leave, or workers' compensation. Therefore, having adequate life insurance can provide financial peace of mind for you and your family.

When considering life insurance, it's important to assess your individual needs and circumstances. As a freelancer, your income may fluctuate, and you may have different expenses compared to those in traditional employment. Here are some key things to keep in mind:

Income Protection Insurance:

Income protection insurance is a type of policy that can provide regular payments based on a proportion of your earnings if you are unable to work due to illness or injury. This type of insurance is available to self-employed freelancers and can be crucial in maintaining financial stability during periods of unforeseen circumstances. When choosing an income protection policy, consider the following:

• Eligibility: To be eligible for income protection insurance, you typically need to work a minimum number of hours per week, usually around 20 hours.
• Income Considerations: As a freelancer, your income may vary from year to year. For income protection insurance, your income is typically calculated as the amount your business earns minus any costs or expenses incurred. Insurers may request copies of previous years' tax returns to determine your income.
• Indemnity vs. Agreed Value Policies: Indemnity value policies cover a percentage of your annual salary at the time of the claim, while agreed value policies insure you for a predetermined amount, regardless of any income fluctuations. Agreed value policies are usually more expensive but can be more suitable for freelancers with variable income.
• Waiting and Benefit Periods: Shorter waiting periods for receiving benefits typically result in higher premiums. Similarly, longer benefit periods offering extended coverage come at a higher cost. You can choose waiting periods ranging from 14 days to 2 years and benefit periods such as 2 years, 5 years, or up to age 70.
• Tax Considerations: Income protection insurance premiums may be tax-deductible for self-employed individuals, but benefits received are generally considered taxable income. Consult a tax professional for specific advice.

Additional Considerations:

In addition to income protection insurance, there are other types of insurance that self-employed freelancers may want to consider:

• Business Expense Insurance: This type of insurance covers fixed business expenses, such as rent, utilities, and employee salaries, if you are unable to work due to sickness or injury. It helps keep your business running even when you can't.
• Professional Indemnity Insurance: If you provide professional services, this insurance can protect you against claims arising from alleged negligence or errors in your work.
• Product Liability Insurance: If you sell products, this insurance can protect you against claims arising from product defects or issues that cause harm to customers.
• Tool Insurance: If you rely on specific equipment or tools for your work, this insurance can provide quick replacement or repair in the event of theft or damage.
• Life Insurance: Life insurance provides a lump-sum payment in the event of your death or a terminal illness diagnosis. It can help cover commitments such as your mortgage, school fees, or other debts.

When considering life insurance as a self-employed freelancer, it's important to compare different policies and providers to find the most suitable coverage for your needs. Consult an insurance professional to guide you in choosing the right insurance options for your specific circumstances.

Life insurance for self-employed business owners

Being self-employed can be rewarding, but it's important to factor financial protection and insurance into your plans. As a self-employed person, you may not be entitled to some of the safety nets that come with working for an organisation, like sick pay, personal leave, or workers' compensation. This can make life insurance and income protection insurance even more important for self-employed people.

Life Insurance

Life insurance exists to ensure your needs and those of your family are met if you’re no longer able to provide financial support. Your policy can provide financial support for a range of events and circumstances, depending on your insurance provider, the type of policy you choose and the level of cover you need. This includes things like rehabilitation and medical costs if you become disabled, and a certain percentage of your income being covered for a set number of years if you’re unable to work because of health issues. In the event of your death, it can also provide money for your dependents to pay for living costs.

If you have dependents who rely on your income or shared debt, like a mortgage, a life insurance policy will be useful. Life insurance can provide a lump-sum payment if you die or are diagnosed as terminally ill. Commitments like your business, mortgage, school fees for children, and other debts can be covered under life insurance.

Income Protection Insurance

Income protection insurance is often included in many life insurance policies but can also be taken out separately. This type of insurance replaces a portion of your income (up to 85% according to ASIC) if you become ill or injured and are unable to work. Payments are usually made monthly for an agreed-upon time, normally until the average retirement age of 65. Income protection insurance can provide regular payments based on a proportion of your earnings if you are unable to work due to illness or injury.

Income protection is particularly important if you’re self-employed and don’t have sick leave or other leave entitlements. There are two types of income protection policies: indemnity value and agreed value. An indemnity value policy covers you for a percentage of your annual salary at the time you make a claim. So, if your salary has decreased since you bought the policy, you'll likely get a smaller monthly insurance payment. An agreed-value policy is usually more expensive, but could be useful for self-employed people whose income changes year-to-year. With this type of policy, you agree on the amount you’ll be insured for when you take out the policy, so your insurance payments won’t change when you make a claim even if your income has dropped.

Business Expense Insurance

Business expense insurance is designed to cover certain business expenses in the event that you are unable to work due to illness or injury and, therefore, may not offer the same breadth of benefits as income protection. It covers ongoing fixed business costs, like rent, utilities, and employee salaries, if you’re temporarily unable to work. This insurance is crucial for maintaining your business’s stability during health-related absences.

Tax deductions for self-employed life insurance

Life insurance is important for self-employed people, especially if they have people depending on them and their business for survival. It can provide a financial safety net for their family if they pass away. However, life insurance premiums are generally not tax-deductible for self-employed individuals. There is an exception if you own a business and offer life insurance as an employee benefit. In this case, you can deduct the premiums you pay for your employees' life insurance. Additionally, income protection insurance, which is often included in life insurance policies, can be claimed as a tax deduction when taken out as a standalone policy.

According to the Internal Revenue Service (IRS), self-employed individuals can deduct "overhead insurance that pays for business overhead expenses incurred during long periods of disability caused by injury or sickness." However, they "can't deduct premiums for a policy that pays for lost earnings due to sickness or disability." This means that while disability insurance premiums are not deductible, certain types of business overhead expense insurance premiums may be deductible for self-employed individuals.

It is important to note that if you deduct the premium for business overhead expense insurance, any proceeds from the policy will be considered taxable income. On the other hand, if you pay the premium yourself and do not deduct it, the policy benefits will not be taxable. Therefore, it is essential to consult with a tax professional to understand the tax implications of your specific situation.

Business expense insurance for self-employed

Yes, self-employed people can get life insurance. In fact, it is highly recommended that they do so, as they may not be entitled to the same safety nets as those working for an external organisation, such as sick pay or workers' compensation.

Now, let's focus on business expense insurance for the self-employed.

Business expense insurance is designed to cover specific business costs in the event that a self-employed person is unable to work due to illness or injury. This type of insurance ensures that essential business expenses are covered, even if the self-employed individual is not generating an income. This can include expenses such as rent, utilities, insurance premiums, and employee salaries.

• Coverage: Business expense insurance will cover pre-defined business expenses outlined in the policy's product disclosure statement. These may include office costs, marketing expenses, employee salaries, and more.
• Illness and Injury Protection: This insurance provides financial peace of mind if you are unable to work due to illness or injury. It ensures that your business expenses are covered during this challenging time.
• Distinction from Income Protection: It is important to note that business expense insurance is different from income protection insurance. While business expense insurance covers specific business costs, income protection insurance provides a regular income stream to cover personal and business expenses, such as mortgage payments or employee salaries.
• Tax Implications: In some jurisdictions, business insurance policies may be classed as tax-deductible expenses. This means that the cost of the policy can be deducted from taxable profits, potentially reducing the overall tax liability for the self-employed individual.
• Record-Keeping: To make the most of business expense insurance and tax deductions, it is essential to maintain meticulous records of business expenses. This includes tracking and categorising expenses as tax-deductible or non-tax-deductible, as per applicable laws.
• Customisation: Business expense insurance can often be customised to suit the specific needs of the self-employed individual. This allows for flexibility in covering relevant business expenses, whether they are office costs, equipment purchases, or other operational expenditures.

In summary, business expense insurance for the self-employed is a valuable tool to protect against financial losses due to unforeseen circumstances. It ensures that essential business expenses are covered, providing stability and peace of mind to self-employed individuals during challenging times.

Frequently asked questions