Income protection insurance and your business survival

How long could you keep paying the bills if you had a serious accident? Income protection insurance is a cost to business that entrepreneurs probably can’t afford to do without. But LUCINDA SCHMIDT warns to watch out for the pitfalls, and get the right co

By Lucinda Schmidt

How long could you keep paying the bills if you had a serious accident? Income protection insurance is a cost to business that entrepreneurs probably can’t afford to do without.

Four years ago, Stefan Kazakis decided to get serious about income protection insurance. His business coaching company, Action Coach, has a six-figure monthly turnover, generating a big income for the 39-year old serial entrepreneur, and he wanted to make sure his young family’s lifestyle – and the debt repayments on his large property investment portfolio – were covered if he couldn’t work for a lengthy period.

“Income protection means I can sleep,” says Kazakis, who has cover for 60% of his current income until he’s 65, with a 30-day waiting period. “I see it as a cost of goods sold. It’s taken me a lot of hard and smart work to get to where I am, so it would be a gross misconduct of my business not to have it.”

Income protection insurance (sometimes called disability insurance) pays you a monthly amount if you are unable to work because of sickness or injury. You can take out an agreed value policy, to receive a set amount, or an indemnity policy that pays you up to 75% of your income over the year or two before you make the claim. Premiums are 100% tax deductible.

Penelope Joye, a senior financial adviser with Sydney firm Taylor Shadforths, says her SME clients often resist the idea of income protection at first, seeing the cost as money out of the business. But she says it’s vital, because many entrepreneurs have quite a bit of debt – and no savings to tide them over, because they channel all their spare money into the company.

“If they get sick, their business grinds to a halt and they’ve got no income,” says Joye, who recently had a 40-year-old super-fit client suffer two crushed kneecaps when he was knocked from his bike. He was away from his business for five months, unable to sit, stand or walk.

“Your ability to earn an income is your most valuable asset,” Joye says. But she notes that the big problem for SME owners, especially start-ups, is being able to prove what they earn. “Generally, the insurance companies like to see at least two years’ proof of income,” she says. Sometimes she liases with the insurers, providing accountant’s reports, cashflow statements, invoices, tax returns and other documents to help prove her clients’ income levels.

Scott Haywood, a senior adviser at Melbourne’s Haywood Financial Management, says many of his SME clients have basic income protection insurance through an industry super fund or retail master trust. It’s better for cashflow, because the premiums come out of their super contribution. It’s also cheap (around $1 to $5 a week) and you don’t usually have to provide all the medical reports needed for a stand-alone income protection policy.

But there are two catches. The super funds’ insurance payments usually cut out after two years. And, for big income earners, the maximum amount through super is unlikely to be enough.

Haywood tells his clients to take out the basic super fund cover, plus a separate insurance company policy. Those who think they can survive on the super fund policy payments can select a two-year waiting period on their other policy, so it’s just a back-up if they are off work for more than two years. Those who need a bigger income should select a shorter or no waiting period on their second policy.

Peter Webster, 59, who runs his own management consultancy business, Webster & Co, in Sydney, has had income protection insurance since he started his business 30 years ago. He’s insured for a fixed $10,000 per month, which kicks in after six weeks off work and lasts until he’s 65.

“It’s not inexpensive, but I see it as part of the operating costs of the business,” he says. “I’ve seen so many of my colleagues have major illnesses like heart attacks and end up nearly destitute.”

What to think about

Do I need it? Not if you have enough savings or income-earning assets, or a working spouse to support you and your family for months or even years. Otherwise, yes.

What about WorkCover and TAC payments? They only cover you for work-related illness or injury, or road trauma. They won’t pay if, for example, you’re struck down by a mystery virus for six months, or you ski into a tree on holidays.

What about my super fund insurance? Most of the big industry super funds offer optional salary continuance insurance. But it’s usually for a maximum of only two years, and it may not be enough if you are a high earner.

How much do I need? Look at how much you need to live on, factoring in mortgage and other debt repayments, and expenses such as school fees.

How much does it cost? That depends on how much you insure yourself for, whether you’re prepared to have a waiting period, and how long you want the payments to last for. It’s more expensive for females, older people, those in poor health and blue-collar workers. But remember, the premiums are 100% tax deductible.

Any traps? Like all insurance, check the definitions and exclusions. A key one is “unable to work”. Does this mean work in your usual job, any job or a couple of key functions of your present job?