Income protection in sickness and health

Small business owners need to think about what they would do if they were unable to work, writes Alexandra Cain.

Small business owners routinely insure their premises, employees and equipment, but all too often they fail to protect their own income. The consequences can be dire.

Adrian Clerici, partner at Pitcher Partners business advisory and accountants, says income protection insurance is one of the best ways for a business owner to protect his or her family, as well as any silent shareholders in the business who are reliant on the income.

"Typically, they might have a mortgage that they might not be able to service or day-to-day living expenses that they won't be able to meet if there is no income protection insurance," he says.

David Rowell is the national practice leader for Willis Employee Benefits. Willis is a global network of insurance brokers.

Rowell says about 90 per cent of people have no privately arranged income protection insurance. According to Willis' statistics, the likelihood of experiencing a critical illness before the age of 70 is shown to be about 59 per cent for males and 42 per cent for females. This could include being diagnosed with cancer, suffering a stroke or heart attack, or even death from a critical illness.

"While it may sound cliched, it is a fact of life that accidents do happen and people do get ill," Rowell says. "It's extremely important to plan to protect against the financial hardship this could cause, particularly if you are a small business owner."

Without income protection insurance, business owners may find themselves unable to pay not just mortgage repayments and other debts, but also the education costs of their children, in addition to carer costs.

And unless the business owner's salary is covered by income protection insurance, in the event of a serious illness or accident, they will usually have to use their own funds to pay for a replacement person's salary. This can seriously affect the long-term financial health of the business owner, as well as their family.

"Income protection can provide financial assurance around these costs, giving peace of mind that the financial future is secure for them and their family," Rowell says.

Cameron Douglas, managing client service consultant with insurance brokers Marsh Australia, agrees that the best way for small business owners to protect their livelihood is with income protection insurance.

"Taking out this type of cover means that if the business owner falls ill or experiences a serious accident so they can no longer work in the business, they can afford to look after themselves and their family," he says.

Douglas says an option if a business owner has to make a claim is to divert the payout from the insurance policy to cover someone else's salary, effectively replacing the business owner but without incurring additional costs in the business.

Mike Cutter, chief executive of OAMPS Insurance Brokers, says small business owners need to ask themselves: can I support my family if I am injured and need to take several months off work?

"If you are not confident that you would be comfortable without the money coming in, then income protection could be the right solution for your peace of mind," he says. "Income protection will cover up to 75 per cent of your income if you are unable to work due to serious sickness or an accident."

The cost of cover will vary, and depends on the age, sex and health history of the policyholder, as well as whether they smoke.