One of the most undervalued resources of small business owners is their time. They not only undervalue the time they spend in the business, they in many cases don’t take out income protection insurance to cover them if they can’t work.

Q. I have been running my own business for three years now and have become worried about what would happen if I can’t work for some reason. I have thought about taking out sickness and accident insurance but thought that it relates more to people who are employed.  How does a self employed person prove the income they make and what happens if this changes?

If I have to make a claim what proof does the insurance company need, is a doctors certificate sufficient? If I have to make a claim is there a waiting period and how long would I receive these payments for? If I broke my leg and claimed for six months then returned back to work would my monthly premiums change?

A. As you have been running your business for three years you will be able to use the profit and loss statements or your tax returns for that period to prove the level of cover you want. Most insurance companies only allow you to insure up to 75 per cent of the income you earn.

There are two types of income protection you can take out. Under indemnity cover if your income dropped the amount of insurance cover would drop. The other cover is called agreed value and, although more costly, the level of cover stays the same even if your income fluctuates.

In most cases the form used to claim benefits has a section that must be completed by your doctor. Depending on the nature of the claim or injury more information or proof may be required.

There are a number of different waiting periods you can choose before your cover commences. The most common tend to be 30, 60, or 90 days. The longer the waiting period the cheaper the premium tends to be.

The length of time benefits will be paid can also differ. Because the main purpose of the insurance is to cover really serious injuries or illnesses, that affect your long term earning ability rather than short term interruptions to your income, it makes sense to take out cover that will last until you are 65. By opting for a longer waiting period the cost of the cover can be more affordable. 

Premiums should not increase as a result of making a claim. If you take out cover with a stepped premiums it increase each year as you get older. Level cover can be taken out but is more expensive initially but only increases if the cover increases with CPI but delivers a saving if the insurance is held for most of your working life.

Income protection insurance is tax deductible so the effect it has on your cash flow is reduced due to the saving in tax. 

Questions on small business tax or other issues can be emailed to business@taxbiz.com.au

Tax for small business, a survival guide, by Max Newnham is available in bookstores and as an ebook.