For self-employed people or those in a small partnership, income protection insurance only provides a portion of the necessary protection in the event of illness or injury. That is why business expense insurance – in addition to income protection – can be fundamental to ensuring the continuity of the business.
Amir, a glazier and keen sportsman, has recently set up his own business as a sole-trader. He earns a net income of $10,000 per month and insures himself for $7,500 under Income Protection (i.e. 75% of his income). He does not have business expense insurance.
Amir dislocated his knee while participating in a social footy game and the doctor is adamant he must remain off his knee for up to six months. Although Amir has stopped earning an income, his business expenses of $2,400 a month continue to accrue.
Amir’s income has dropped from $10,000 per month (pre-disability income) to $7,500 (income protection benefit payment) – but he must continue paying his business expenses.
Once these costs are subtracted, he is left with just $5,100.
This leaves Amir with 51% of his pre-disability income to cover his personal expenses including the mortgage, children’s school fees and general day-to-day costs.
If Amir had taken out business expenses insurance, the $2,400 p.m. shortfall would have been covered by the insurance.
Excerpt from our eNewsletter July 2014
Disclaimer: Any information in this document is general only and does not take into account the objectives, financial situation or needs of any particular person and therefore is strictly not intended to be financial or taxation advice. You should obtain financial and taxation advice relevant to your specific circumstances. Whilst every care has been taken in the preparation of this information, SJW Accountants do not guarantee the accuracy or completeness of the information.