Small business options

Self-employed people, who are typically small business owners often ignore income protection insurance despite having many business and personal debts to their name. Financial protection should be at the top of a business owners' checklist, so why do so many ignore the risks?

When you're self-employed and a small business owner, you pour your heart and soul into your business. And why wouldn't you, it's yours!

But what many small business owners fail to think about is the vulnerability of their financial situation.

Having so much at stake, both emotionally and financially, might be great for motivation. But it's not so great if something happens to you and you can't work.

And it can be even more devastating if you've got a family depending on you.

Do you have income protection insurance?

According to a 2006 survey by the Investment and Financial Services Association (IFSA), less than half of small business owners feel they have adequate cover (1).

So if they know they're not properly covered, why aren't they doing something about it?

One of the reasons is that there's a perception that income protection insurance is too expensive.

But think about the sort of money you'd lose if you couldn't work for a few months; or worse if you could never work again. It certainly helps put the cost of income protection insurance into perspective.

Income protection insurance is tax deductible

Income protection insurance is one of the most relevant types of cover for everyone, including small business owners. It can replace up to 75% of your income if you can't work because of sickness or injury.

In the IFSA survey, 95% of small business owners said they were aware of what income protection insurance was, but 56% thought it was too expensive (1).

So cost is obviously a big reason for the lack of protection.

But the fact 47% of respondents did not know that income protection insurance premiums were tax-deductible shows there's a lack of understanding around how much insurance actually costs (1).

Business expenses insurance - which covers your fixed business expenses like rent, electricity and non-income producing staff wages if you can't work because of sickness or injury, is also tax-deductible.

So by combining these two types of policies you can cover your work and personal expenses, and potentially reduce your tax bill.

Cost of income protection insurance for small businesses

Example A

Let's take the example of a 37-year old male plumber who earns $80,000 pa. He takes out:

an income protection insurance policy to cover 75% of his income (or $5,000 per month), and
a business expenses insurance policy to cover $5,000 per month of fixed business expenses.

His total premium before tax is $4,017. But because his premiums are tax-deductible, his after-tax premium reduces by 41.5% (his marginal tax rate) to $2,350. At about $45 per week, that's the equivalent of a take-away pizza and a six-pack of beer each week.

Example B

Let's take the example of a 39-year old male doctor who earns $120,000 pa. He takes out:

an income protection insurance policy to cover 75% of his income (or $7,500 per month), and
a business expenses insurance policy to cover $10,000 per month of fixed business expenses.

His total premium before tax is $2,660. But because his premiums are tax-deductible, his after-tax premium reduces by 41.5% (his marginal tax rate) to $1,556. At about $30 per week, that's the equivalent of a take-away pizza each week.

Source: Asteron Life Limited, based on a non-smoker taking out an Agreed Value Income Advantage policy(65 year benefit period), and an Indemnity Contract Business Expenses policy (12 month benefit period), both with 30-day waiting periods and stepped premiums paid annually.

Find the best income protection insurance for small businesses

The best way to find out what cover you need is to speak to a financial adviser. They can help you find the right income protection insurance quotes, and make sure it's structured in a way that makes it as cost-effective as possible.

Everyone needs personal insurance. But few people need it more than small business owners. So make it your business to get the advice, and the cover, you need.

Source: Asteron 2010

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April 2011