Sole trader’s guide to income protection

Being a sole trader means you don’t just own the business — you are the entire business, and when your business is your livelihood, every dollar counts.

Without the safety nets that employees often enjoy, like sick leave or workers' compensation , your income depends entirely on your ability to work. This makes income protection insurance  a top concern for sole traders. After all, if something unexpected happens, like an illness or injury, who will keep the business running and the bills paid?

So, what exactly is a sole trader? In general, a sole trader is an individual who runs and owns their business independently. But while running your own business gives you full control, a downside can be [SS4] that your entire livelihood hinges on your ability to work.

Discover income protection insurance for sole traders, delve into the benefits, and risks of these policies, and hear from people in the industry and real Australian sole traders so you can decide if income protection policy is right for you.

The state of play for sole traders in Australia

According to the Australian Bureau of Statistics, as of June 2024, there were 2.6 million actively trading businesses in Australia, with sole traders accounting for roughly 0.8 million of these.

Despite the importance of these self-employed individuals, they also face financial challenges that can affect both their businesses and personal lives.

Unlike salaried employees who have access to workers' compensation and paid sick leave, sole traders must be responsible for their own financial security. They may need to manage inconsistent income, cover ongoing business costs, and may need help in support themselves if they can’t work due to illness or injury.

Rachel Lake, founder and creative director of Rachel Beth Jewellery in Sydney, puts it simply: “As a sole trader, my business and personal income are tightly interwoven. This reality makes it crucial to have safeguards in place to protect my livelihood.” Rachel’s first-hand experience as a sole trader highlights why having income protection insurance can play an essential part in managing these risks.

If you can't work due to illness or injury, income protection insurance may help cover costs and reduce financial stress. That way, you may focus on getting better and returning to work as soon as possible.

What are the benefits and considerations of income protection insurance for sole traders?

Income protection insurance is designed to cover a portion of your lost income if you’re unable to work due to illness or injury. This type of insurance cover usually pays a portion of your pre-tax income, which may help in allowing you to focus on recovery.

Here, we’ve compiled some of the key benefits and considerations that income protection insurance can offer:

• Financial stability during tough times: Income protection offers a benefit amount that can cover up to 70% of your pre-tax regular income, providing a safety net when you’re unable to work. This can help you manage personal and business fixed expenses like mortgage payments, rent, or utility bills.
• Peace of mind: Knowing that your income is protected can reduce stress and allow you to focus on your recovery. As Rachel Lake puts it, “Income Protection insurance offers a financial safety net that covers a portion of my income if I am unable to work for an extended period.” Depending on your personal situation, income protection policies typically offer cover up to a specified period of time, such as two or five years, or a specific age (such as 65).
• Flexibility in cover: Some aspects of income protection policies may be tailored to suit your specific needs, including the waiting period, benefit period, and income protection premiums. For example, if you have a healthy savings balance, you might opt for a longer waiting period which can help reduce your premiums.
• Tax deductibility: For self-employed people, the income protection premiums are often tax-deductible, which could be one cost-effective way to safeguard your financial future.
• Coverage for business expenses: Some policies offer additional coverage options which might cover ongoing costs like leasing business premises or equipment.
• Considerations: In addition to benefits, there are also considerations to keep in mind when deciding on Insurance. Some examples are provided below, such as the benefit and waiting period.  

An expert's two cents on income protection insurance for sole traders

We spoke with Don Shields, an insurance broker, who highlighted the crucial role income protection insurance can play for sole traders. He explained, “All sole traders should seriously consider some form of income protection cover. As sole traders, they aren’t covered by workers' compensation insurance and still have ongoing expenses that need to be paid, whether they’re working or not.”

Don also clarified the differences between income protection and personal accident insurance, which cater to different needs. Income protection insurance offers broad coverage for both illness and injury that prevents you from working, while personal accident insurance specifically addresses injuries from accidents and typically doesn’t cover illnesses.

When choosing an income protection policy and deciding if they need one, he encourages every independent contractor and sole trader to consider these factors:

• Benefit period and waiting period: Determine how long you’ll need coverage if you can’t work and how long you can wait before receiving payments. These choices can impact your premiums.
• Cover amount: Assess how much coverage you need based on your business expenses, personal financial obligations, and variable income.
• Policy inclusions: Compare different policies to understand what’s covered, including specific business expenses or extra benefits like private health insurance.

[H2] Ways to compare income protection insurance options

Given the variety of income protection options available, it's important to compare policies carefully. Here are 5 things to consider when comparing income protection insurance policies:

1. Assess your needs: Understand your financial situation, including your monthly expenses, business profits, and any savings. This could help determine the level of income protection cover you might need.
2. Evaluate policy features: Look at the benefit period, waiting period, and any exclusions or limits within the policy. Some policies may offer higher payouts but have a longer waiting period, which might not be suitable if you lack substantial savings.
3. Compare insurance premiums: Income protection insurance premiums can vary depending on factors like your age, occupation, and the level of cover you choose. Use comparison tools to find a policy that balances cost and cover.
4. Review the product disclosure statement (PDS): The relevant product disclosure statement will detail the policy’s terms and conditions. It's essential to read this carefully and seek clarification from your insurance provider if needed.
5. Seek professional advice: Consult with a registered tax agent or financial adviser to ensure that the policy aligns with your personal circumstances and provides the right level of protection.

Additional insurance considerations for sole traders

Beyond income protection, it can be helpful for sole traders to consider other types of insurance that could be essential for their business operations. It is important to note that these (and most) insurance products include risks, eligibility criteria, terms and conditions and may not be suitable for your needs. Examples include:

• Professional indemnity insurance: This can cover certain legal costs and claims if ever your business is held responsible for mistakes, missed deadlines, or other professional errors that cause harm to someone else.
• Public liability insurance: This can cover legal costs and offer compensation if your business is found liable for causing injury or damage to property.
• Business insurance: Typically includes cover for physical assets like tools, stock, and premises. Sole trader insurance packages can often bundle several types of cover to protect against various risks.
• Workers’ compensation insurance: While not required for sole traders themselves, this is mandatory if you employ staff.

Income protection insurance is a safety net for different types of people, including sole traders, offering financial security and peace of mind if you get sick or injured and can’t work and earn an income. By understanding the benefits and risk, and carefully considering if a policy fits your needs, you can help make sure you’re protected, if the specified challenges in the relevant insurance products arise.

Keep Reading: Learn more about income protection insurance for contractors

Want to know more about how much income protection insurance you can get? Whether you're just starting out as a sole trader or have been running your own small business for years, you may want to explore insurance options to protect your income. See if Real Income Protection Insurance might be something worth considering and request a quote online now.