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Should you get life insurance if you’re self-employed?

Woman looking at phone and laptop in home officer, considering life insurance as a self employed person.

Whether you work for yourself or as an employee, life insurance exists to ensure your needs and those of your family are met if you’re no longer able to provide financial support. 

Sure, when you’re starting out on a business venture to become your own boss, failing ill or even dying probably isn’t top of mind. But once your business is up and running, life insurance and income protection can be even more important for self-employed people. Here’s why.

Why do you need life insurance if you are self-employed?

Depending on your insurance provider, the type of policy you choose and the level of life insurance you need, your policy can provide financial support for a range of events and circumstances. 

This includes things like rehabilitation and medical costs if you become disabled, and a certain percent of your income being covered for a set number of years if you’re unable to work because of health issues. In the event of your death, it can also provide money for your dependents to pay for living costs that would have otherwise been covered by your income.

For self-employed people, there may be additional business-related costs to consider like fees for accountants, lawyers and taxes, plus overheads like property or equipment leases and maintenance, and potentially employee salaries. If you’re a shareholder in the business you run, there could even be implications for the beneficiaries of those funds and any other shareholders.

Of course, what your life insurance will need to cover depends on the type of business you’re running. Perhaps you’re a freelancer working solo and most of this won’t apply. Or on the other end of the scale, you might be someone who owns and runs a company alongside other co-owners, so you’ll need to take all of this into consideration. 

But in all cases, a life insurance policy will be useful if you have dependents who rely on your income or shared debt like a mortgage that’ll need to be sorted out if you can no longer pay back the loan. 

Should you get income protection if you are self-employed?

Income protection insurance is often included in many life insurance policies, but can also be taken out separately. This type of insurance replaces a certain portion of your income – up to 85% according to ASIC – should you become ill or injured and are unable to work.  

Payments are usually made monthly like a salary for an agreed upon time (normally set to expire at the average retirement age of 65), and qualifying for them will depend on the definition of partial or total disability in your insurance policy.

Income protection is particularly important if you’re self-employed and don’t have sick leave or other leave entitlements. Freelancers or contractors with income that fluctuates over time should carefully consider the two types of income protection policies: indemnity value and agreed value. 

An indemnity value policy covers you for a percentage of your annual salary at the time you make a claim. So, if your salary has decreased since you bought the policy, you'll likely get a smaller monthly insurance payment. These policies are generally cheaper and may be suitable for people with a stable income.

An agreed value policy is usually more expensive, but could be useful for self-employed people whose income changes from year-to-year. With this policy type, you agree on the amount you’ll be insured for when you take out the policy, so your insurance payments won’t change when you make a claim even if your income has dropped recently.

Is it worth having life insurance via your super fund?

There are two ways to get life cover in Australia: via a standalone life insurance policy or through your superannuation. There are benefits and drawbacks with each, but the general rule with super life insurance is that premiums are lower and coverage is more limited.

This is because standalone policies from direct life insurance providers require assessments of your lifestyle, health and personal and financial circumstances to determine premiums and policy coverage tailored to your needs. Super policies usually come as default when you sign up to a fund, and don’t require these checks unless you have a pre-existing medical condition or work in an industry that’s considered dangerous. 

You might choose the super life insurance road if it suits your budget better and you don’t have major debts or a family to support. In this circumstance you might just opt for income protection to support yourself if you’re put out of work. Also keep in mind that some funds will let you increase your cover via super (for an increased premium) above the default level, but you’ll likely need to answer some health-related questions to do so.

ASIC’s moneysmart site estimates 70% of Australians hold life insurance via their super funds.

Is life insurance tax deductible?

If you buy life insurance as a standalone policy or have it built into your superannuation, this won’t be tax deductible if you're self-employed. However, you can claim your income protection as a tax deduction when you’ve taken it out as a standalone policy.

The amount you’ll be able to claim will depend on what you earn and the tax bracket that puts you in, and what you pay for income protection insurance premiums. Just remember, you’ll need to declare any payments you receive through an income protection insurance policy with the ATO, as this is considered part of your taxable income.

If you’re preparing all your paperwork for tax time, be sure to read up on these EOFY must-knows for freelancers and how super factors into your tax return.

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Olivia Gee
Olivia Gee
Money writer

As a personal finance writer at Mozo, Olivia investigates insurance, banking and property. After completing a double degree in journalism and media and communications, Olivia became a lifestyle editor at Time Out Sydney and freelanced for notable publications such as Guardian Australia and SBS News. Now she is Mozo’s resident car insurance enthusiast, and is certified (ASIC RG146 Tier 2) to provide general advice in general insurance. She also creates audible finance adventures as co-host of Mozo’s podcast, The Finance Burrito.

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