May 14, 2019 Last updated May 22nd, 2020 2,082 Reads share

Income Protection Insurance Tips for Business Owners

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How would you cope financially if you suffered an illness or injury that meant you can no longer return to work? If you are self-employed, walking into this scenario unprepared can be catastrophic for your future earnings and long-term business growth.

Statistics reveal that half of all businesses fail within their first five years with a lack of financial foresight contributing to many of the obstacles that business owners face in their journey.

Despite income protection insurance existing to protect individuals against situations that are tough to envision, less than half of people in America own some form of cover for serious illness or disability(1). In this short guide, you will discover what income protection insurance is and how it can offer financial peace of mind for your business.

Growth Changes in Your Business

Insurance can also offer a certain level of financial reassurance through times of business expansion, updating a business model, or both, which can be a huge strain on your time and any high level management that report directly into you. And with growth comes an ever-evolving set of risks that may surface, which you may need to prepare for with appropriate business insurance. Growth changes can include the following:

  • Opening a new location
  • Hiring new employees
  • Offering new products or services
  • Bringing on new investors

What Is Income Protection?

Sometimes abbreviated to IP, income protection insurance is a type of life insurance product designed to replace up to 75% of your income when you can’t work due to a serious illness or injury. IP payments can support you and your family financially during these turbulent times. Payments are administered by your insurer and are received by the policyholder on a monthly basis. The monthly benefit typically covers up to 75% of any pre-tax income. Eligibility for IP may vary depending on the insurer but generally speaking, you need to be aged 18-60 to apply for cover.

Income Protection Insurance vs. Life Insurance

Income protection differs from life insurance in that it protects against loss of income, whereas life insurance results in a lump sum payment in the event of death or terminal illness so you don’t leave any unpaid debt for your family.

But both types of cover exist to provide sufficient protection against financial hardship in each of these outcomes. It is therefore wise to read up on the eligibility factors and benefits of both income protection and life insurance to rest assured you are taking out the right type of cover to suit your immediate and long-term needs.

Benefit Period and Waiting Periods

Unlike term life cover or death cover, an income protection insurance policy has a defined shelf-life agreed upfront. This is known as the benefit period and pertains to how long you want to be covered for, which can be either:

  • A standard two-year period, or
  • Up until you reach 65 years of age.

You maintain control over what you pay into the policy and when, which dictates the amount of the payouts if you are unable to work due to the aforementioned unforeseen circumstances.

But before the benefit can be activated, it’s commonplace for the insurer to insist on a 30 or 90 day waiting period, which is the time you must wait from when you become unable to work to when you become eligible to start receiving IP benefit payments.

Income protection payments may fluctuate depending on which benefit period option you choose(2).

Risk of Occupation

Because of the nature of the income protection product, it covers most occupations bar a few exceptions which fall into the high-risk category. Risk is determined by a number of factors, including how likely you are to make a claim during your time of employment. Occupations that are perceived to be high risk by insurers are listed below:

  • Working at heights, for example
  • Working underground
  • Working with firearms
  • Working with explosives or dangerous chemicals
  • Serving in the armed forces
  • Working in any other occupation in a war zone
  • Working in an occupation that exposes you to diseases
  • Working with heavy machinery
  • Working in any occupation that exposes you to danger
  • Occupation is an influencing factor in determining the level of cover you can receive and what premiums you will pay.(3)

Tax Deductions

A major point of interest for self-employed workers is whether income protection is tax deductible. It generally is, however, there are certain stipulations to be mindful of. If you take out multiple life insurance products with an insurer you may only claim a tax deduction for premiums paid for the IP component.

Business Expenses Insurance

Outside of seeking income protection insurance, you may also explore the benefits of taking out cover for your business overheads in case the unexpected happens. Business expense insurance can offer financial support to keep your enterprise running if you are unable to continue paying for assets such as office space or work vehicles. Other assets covered under business insurance can include:

  • Accounting and audit fees
  • Administration costs, postage, printing, and stationery
  • Electricity, gas, heating, water, telephone and cleaning costs
  • Leasing costs of plant and equipment
  • Bank charges and interest on business loans
  • Business related insurance premiums but not including premiums for this policy

It is essential that the fixed expenses of your business will still be paid even if you cannot work due to injury or sickness. Reducing business expenses can be a challenge in itself, so it’s worth devising strategies to minimize unnecessary payments from day one or when income is limited.

Regardless of your profession and how healthy your balance sheet is, income protection should be considered as an important asset in your financial toolkit when growing your business. Be sure to read up on key facts about insurance coverage to ready yourself for any business-related challenges on the horizon.


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Tom Willis

Tom Willis

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