Statistics show that 1 in 3 Australians will be off work for an extended period of time due to sickness or injury. And the statistics are even higher for tradesman. The equipment is not making money if the operator can’t work!

It’s not something we want to think about, however any successful business plan considers contingencies and is prepared for the unexpected. A successful business plan includes Income Protection and Business Expense Cover. This will ensure that your business and family are taken care of if the income is turned off.

So what exactly do they cover?

Business expense cover will pay a monthly benefit to assist with the day to day running expenses of the life insured’s business if they are totally or partially disabled and unable to work. This will help with salaries, rent or mortgage payments, amenities bills and many other allowable business expenses.

Income Protection will pays up to 80% of the life insured’s income while they are unable to work due to injury or illness. We will pay a monthly benefit until the life insured recovers, or until the end of the agreed benefit period. These monthly payments allow the life insured to meet their regular expenses and maintain their lifestyle while they are unable to work.

We have found that a lot of sole traders who are setting up their business fail to include this cover in their business plan as minimising the burden on cash flow is paramount. It’s often the case that people in this position are particularly exposed, as their sole source of income relies upon their ability to get up and get on-site each day. They simply don’t have the reserves to draw upon if they can’t work.

The costs of this type of cover can be tailored specifically to meet the needs of each client, to fit within their budget and provide suitable cover. The premiums for both types of insurance are also tax deductible.

Case Study

Troy and his business partner Anthony run a successful contracting business. They both generate pre-tax income of $20,000 per month and are jointly responsible for meeting the total business expenses of $16,000. This leaves them $12,000 each to draw as income every month.

	For the Practice(Per month)	Per Partner (Per Month)
Pre-tax income	$40,000	$20,000
Less ongoing business expenses	$16,000	$8,000
Pre-tax income (after business expenses)	$24,000	$12,000

They have both used income protection insurance to protect 75% of their respective incomes. Troy has also taken out business expense insurance for $8,000 a month, which represents his share of the business overheads.

The table below outlines what could potentially happen if either Anthony or Troy became disabled.

	Anthony Protection plan without business expenses (per month)	Troy Protection plan With business expenses (per month)
Income protection insurance benefit	$9,000	$9,000
Business expenses insurance benefit	$0	$8,000
Total insurance benefits	$9,000	$17,000
Less ongoing business expenses	$8,000	$8,000
Pre-tax income (after business expenses)	$1,000	$9,000

                                                                                                
Anthony’s income protection policy would provide a monthly benefit of $9,000, which represents 75% of his income, net of expenses, but before tax. However, because he doesn’t have business expense insurance, he’ll have to fund the business expenses out of his own pocket-potentially from his income protection policy. As a result, he’s left with $1,000 each month to meet his personal expenses and tax liability.

Conversely, Troy, who also insured 100% of his share of the practices business expenses, will not need to use any of his income protection benefit (or any of his personal savings) to meet his ongoing business expenses.

When seeking advice, ensure that you speak with a licensed adviser with solid experience in the area of risk insurance. As there are plenty of products on the market, it pays to seek out advice to ensure you get what you pay for.

Article written by Chris Lowe – Risk Insurance Broker at Moody Kiddell & Partners.

Moody Kiddell & Partners (Insurance) Pty Limited ABN 48 071 572 828 is an Authorised Representative of  Financial Lifestyle Solutions Pty Limited ABN 86 077 643 960 AFSL No. 232498