Income protection insurance pays you a monthly benefit if you can’t work due to illness or injury. It’s designed to replace a percentage (usually up to 70%) of your income so you can still cover living costs while you recover.
How It Works (Simple Example)
- John is a sole trader plumber. He breaks his leg and can’t work for 3 months. Johns’ income is $5,715 monthly and income protection policy kicks in after a waiting period (say 30 days) and pays him $4,000/month (70%) until he returns to work.
- Emily is an employee marketing manager earning $6,000/month. She gets diagnosed with a serious illness. Her policy covers $4,200/month (70%) after the waiting period and continues paying while she’s unable to work, up to the benefit period (e.g. 2 years or to age 65).
Differences Between Sole Traders & Employees
| Feature | Sole Traders | Employees |
| Proof of Income | Based on tax returns/business records | Based on payslips or employment contracts |
| Income Fluctuations | May need to average over 1–2 years | Usually consistent income |
| Premiums | Often more customised | May be easier to standardise – employees usually have regular, predictable income (e.g. salary), making it simpler for insurers to assess and calculate benefits based on clear income records like payslips or contracts. |
| Benefit Calculation | Net profit (income minus expenses) | Gross salary (before tax) |
Key Things to Be Educated About
- Waiting Period: How long you must be off work before payments start – common options are 14, 30, 60, or 90 days.
- Benefit Period: How long the payments will continue – e.g. 2 years, 5 years, or up to age 65.
- Agreed vs Indemnity Value:
- Agreed Value: You lock in your benefit based on your income when you apply (was available pre March 2020)
- Indemnity Value: Your benefit is based on your actual income at the time of claim (used more often after 2020 regulatory changes).
- Tax Deductibility:
- Yes, premiums are generally tax deductible at your marginal tax rate if the policy is held outside super.
- If held inside super, it’s not typically deductible to the individual. It’s tax deductible in your super account at 15%.
- Benefit payments are taxable, so plan for that at tax time.
- Policy Definitions Matter: Always check how “unable to work” is defined. It directly affects whether you can claim.
- Super Contributions May Stop: While receiving benefits, you may not be contributing to your super – something to consider for long-term cover. There is the option to add super contributions to your benefit so that your retirement savings continue to build.
Need Advice?
Surety Life can help you work out what’s best for your situation – whether you’re a business owner, tradie, or employee.
Contact Surety Life
🌐 www.suretylife.com.au
📧 hello@suretylife.com.au
📞 03 7053 0792