Freelancers and sole traders often enjoy the freedom of setting their own hours and being their own boss, but with this independence comes certain risks. Without a regular employer to provide sick pay or other financial support during tough times, your income may be more vulnerable than you realise. That’s where income protection insurance steps in, providing a financial safety net if you’re unable to work due to illness or injury.
But as a freelancer or sole trader, you might be wondering, “How much cover should I get?” or “How much can I expect to receive if I make a claim?” Let’s break it down.
1. Understanding Income Protection for Freelancers
Unlike salaried employees, freelancers and sole traders face unique challenges when it comes to insurance. Your income can fluctuate from month to month, and you might not have the same safety nets—such as annual leave, sick pay, or worker’s compensation—that employees rely on.
Income protection insurance is designed to replace a portion of your income if you can’t work due to illness or injury. This could be crucial to keeping up with your personal and business expenses, from rent and groceries to loan repayments or contractor fees.
However, calculating how much cover you need and how much you can receive depends on several factors, including your average income and the type of policy you choose.
2. How Much Income Can You Get?
Most income protection policies will cover between 50% and 75% of your average income, but this figure depends on your policy and the insurer. For freelancers and sole traders, insurers typically look at your income over the past 12 months or longer, taking an average to determine your cover amount.
If your income is highly variable, it’s a good idea to keep detailed records of your earnings, including any business expenses and tax deductions. These records will help your insurer accurately assess your income and offer the right level of cover.
In general, the more consistent and well-documented your income, the easier it is to get higher levels of cover. For example, if you’ve been earning $80,000 per year, you could potentially receive up to $60,000 annually through income protection, depending on your policy terms.
3. How Much Cover Do You Need?
Deciding how much cover you need as a freelancer or sole trader comes down to assessing your financial commitments. You’ll want to make sure your cover can replace enough of your income to keep up with both personal and business-related expenses if you can’t work for an extended period.
Start by calculating your essential expenses:
Personal expenses:
Mortgage or rent payments
Utility bills
Groceries and household essentials
Debt repayments (such as loans or credit cards)
Health insurance or medical costs
Business expenses:
Office or workspace rent
Equipment maintenance
Insurance premiums (business and professional)
Subscriptions or software fees
Contractor or employee payments (if applicable)
Once you’ve listed these out, you can get a sense of how much income you’d need to sustain your lifestyle and keep your business running in the event of illness or injury. Aim for an income protection policy that replaces at least this amount—up to the maximum percentage allowed by your insurer.
4. Waiting Periods: How Long Can You Wait?
Income protection policies include a waiting period, which is the time you’ll need to wait after becoming unable to work before your payments kick in. Common waiting periods range from 30 to 90 days, but you can choose longer periods if you have savings to fall back on.
Shorter waiting periods result in higher premiums, while opting for a longer waiting period can reduce the cost of your policy. Consider how long you could realistically cover your living and business expenses with savings, and choose a waiting period that aligns with this timeframe.
For freelancers, having a solid emergency fund is crucial. If you can cover a couple of months of expenses on your own, you might prefer a longer waiting period and lower premiums.
5. Benefit Period: How Long Will Payments Last?
Another factor to consider is the benefit period, which determines how long you’ll receive payments while you’re unable to work. Freelancers and sole traders can typically choose between benefit periods of 2 years, 5 years, or until retirement age.
While longer benefit periods provide more security, they also come with higher premiums. For many, a two-year benefit period is a good balance between affordability and protection, but if you rely heavily on your business income, a longer benefit period may offer peace of mind.
6. The Importance of Regular Reviews
As a freelancer or sole trader, your income and financial situation may change over time. That’s why it’s important to review your income protection policy regularly, especially if your income grows significantly or your business takes on new expenses.
For example, if your earnings jump from $60,000 to $100,000, your current policy might not provide enough cover. On the flip side, if you reduce your workload or scale back your business, you might be able to reduce your cover and save on premiums.
Keep in mind that some policies automatically adjust your cover over time, but you should still check in annually to ensure your policy aligns with your current needs.
7. Getting Expert Help
Choosing the right level of income protection as a freelancer or sole trader can be tricky, but financial advisers can help you tailor a policy to your unique situation. They can assist in calculating the right amount of cover, determining appropriate waiting and benefit periods, and explaining any tax benefits associated with your premiums.
A professional adviser can also help you avoid common pitfalls, such as underestimating your expenses or forgetting to factor in business costs. They’ll ensure your policy provides enough support without stretching your budget too thin.
Ready to Protect Your Income?
Income protection is a vital tool for freelancers and sole traders looking to safeguard their financial security. Whether you’re just starting out or have an established business, it’s worth taking the time to get the right cover. Get started here with Seek Cover and explore your options today.
Additional Resources:
Learn more about income protection insurance for self-employed Kiwis by visiting the Sorted.org.nz self-employment guide.
The Business.govt.nz site offers detailed advice on business finances and insurance considerations for sole traders and freelancers.
Disclaimer: The information in this article is general information only and is not intended as financial, medical, health, nutritional, tax or other advice. It does not take into account any individual’s personal situation or needs. You should consider obtaining professional advice from a financial adviser and/or tax specialist, or medical or health practitioner, in relation to your own circumstances and before acting on this information.
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