In brief
- Income protection replaces part of your income while illness or injury stops you working, after a waiting period and for a set benefit period.
- Premiums for income protection you hold outside super are generally tax-deductible, and the payments you receive are taxable income.
- Key person insurance helps a business cope financially if someone it relies on dies or can’t work.
- New trauma cover isn’t available through super, and own-occupation TPD cover is usually only available outside super.
The risk many business owners leave uninsured
Business owners tend to insure their premises, vehicles and public liability without a second thought. It’s easy to overlook what their income depends on most: their ability to work.
If an owner or key person can’t work because of a serious illness or injury, their income may stop while the business’s costs keep going: rent, wages, loan repayments and suppliers. Personal and business insurance can help cover that gap, but only if it’s in place before it’s needed, and only on the terms of the policy.
Four types of personal cover
Each type of cover pays for a different event. Policies differ between insurers, and the product disclosure statement sets out exactly what is covered and what isn’t:
| Cover | Pays when | How it pays | Tax and super |
|---|---|---|---|
| Income protection | Illness or injury stops you working, after a waiting period | Regular payments that replace part of your income, for the benefit period | Premiums generally deductible outside super; payments are taxable income |
| Life cover | You die; many policies also pay on a terminal illness diagnosis | A lump sum to your beneficiaries or estate | Can be held inside or outside super |
| Total and permanent disability (TPD) | Illness or injury leaves you permanently unable to work, as the policy defines it | A lump sum | Any-occupation cover can be held in super; own-occupation cover is usually only available outside it |
| Trauma | You’re diagnosed with a listed serious condition, such as cancer, heart attack or stroke | A lump sum, whether or not you can work | Held outside super |
Waiting periods and benefit periods
Two settings shape how income protection pays. The waiting period is how long you must wait after you stop working before payments start; most policies offer from 14 days to two years. The benefit period is how long payments continue while you can’t work; most policies offer two or five years, or up to an age such as 65.
Both settings affect what you pay, so compare policies with the same waiting and benefit periods. Think about how long your savings, sick leave and other income could cover your costs, and how long you’d need payments if you couldn’t return to work for a long time.
Key person insurance: protecting the business
Key person insurance is taken out by a business on someone it depends on, such as a founder, a partner or a senior manager whose skills or relationships bring in revenue. Business owners can also insure each other to fund a buy-sell agreement, which sets out how one owner’s share is bought if they die or become disabled.
If a key person or an owner dies or can’t work, insurance can help:
- replace the business’s lost revenue while it adjusts
- cover the cost of finding and training a replacement
- repay business loans, especially where the owners have given personal guarantees
- fund a buy-sell agreement, so the remaining owners can buy the share of an owner who dies or becomes disabled
If your business relies on one or two people, ask what would happen to its income and its loans if one of them couldn’t work for six months.
Inside or outside super?
Many super funds include default life, TPD and income protection cover. Premiums for cover inside super come out of your super balance. That can ease your day-to-day cash flow, but it reduces your retirement savings over time.
Cover held outside super is paid from your own pocket, but you choose the policy and its definitions. Income protection premiums outside super are generally tax-deductible, and own-occupation TPD and trauma cover are generally only available outside super. Some people use a mix of both.
When you apply for cover, you must take reasonable care to answer the insurer’s questions accurately. A misrepresentation can lead to a declined claim or a cancelled policy.
What to do next
Insurance can protect your income, your family and your business from events that would otherwise force hard decisions. The right mix depends on your income, debts, family and business, and it’s worth reviewing when those change.
This article is general information only. It doesn’t take into account your objectives, financial situation or needs. Before you buy or change cover, read the product disclosure statement and talk to Ensurlife about your situation.
