13th August, 2020
Sole traders have more control over their business decisions, but that also comes with more responsibility. That’s where insurance comes in.
Whether you’re a tradie, hairdresser or bookkeeper, if you’ve chosen to operate as a sole trader, you have a unique amount of freedom over your business decisions.
But this freedom also means you’re personally and financially liable should things not go to plan – and that means making sure you’re covered with the appropriate level of insurance.
If you’re just getting started as a sole trader, it may be easy to overlook certain forms of insurance as an unacceptable cost, but this may be setting you up for bigger problems in the future.
What about access to WorkCover? As a sole trader, you’re not classed as a worker and are therefore ineligible to claim workers compensation in the case of an injury.
READ: Sole traders vs companies — key differences explained
Instead, you’ll need to make sure you’re prepared for the worst – from compensation claims against you to personal injury or illness – this article covers six key areas of insurance:
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Sole trader insurance is a contract by which a sole trader receives financial protection against losses from an insurance company.
Sole trader insurances mitigate the risk of financial losses, both big and small, across a number of different categories (see ‘What insurance could a sole trader need?’ below).
In most cases, sole trader insurance is not compulsory. But there are a number of reasons why a sole trader might want to take out insurance policies.
Depending on the type of business you have or industry you work in, you may be legally required to have specific insurance policies in place.
For example, a builder is legally required to take out Home Warranty Insurance in a number of states. This insures the construction work against financial losses due to incomplete building work or bankruptcy. It’s designed to protect those building homes against the death, disappearance or insolvency of the builder.
For businesses where customers visit premises, many small businesses take out public liability insurance.
Consult your industry body to find out what insurances are legal for your work type.
In most cases, sole traders don’t have the financial means to cope with extraordinary or unexpected circumstances.
Insuring a business against certain financial losses may mean the difference between survival and cessation.
Sole traders have enough to worry about without thinking about what could go wrong. Putting the right insurances in place means that sole traders stand a much better chance of achieving work-life balance.
There are many different types of insurance policies you can purchase as a sole trader to protect your business and finances. Here are six of the most common ones.
How would you pay your mortgage and ongoing expenses if you were to fall ill or injure yourself and be unable to work? This is a real consideration for sole traders and freelancers, and it’s the reason Income Protection Insurance is often advisable.
While savings or a partner’s income might see you through, they might not. Some sole traders may be the sole breadwinner, and others – understandably – won’t want to see their nest egg disappear.
Income Protection policies provide financial assistance when you’re unable to earn, via monthly payments of up to 75 percent of your income.
Premiums are usually tax deductible and vary depending on factors including age, benefit amount, and the benefit and waiting periods selected.
Similar to Income Protection Insurance is Personal Accident and Sickness Insurance. This type of insurance can cover up to 85 percent of weekly earnings, but it is generally more limited than Income Protection, with a shorter benefit period.
Imagine you’re a beauty therapist and a customer slips on some product and breaks their leg in your salon. Or perhaps you run a carpentry business and an employee damages a client’s priceless family heirloom…
As a sole trader, you could be paying the price for years to come – unless, of course, you have adequate insurance.
A worthwhile investment for many sole traders, public liability insurance covers compensation costs and your legal fees if a third party sues you for injury or property damage resulting from your alleged negligent business activity.
While it might not be worthwhile if you’re a graphic designer who works from home, if you interact with suppliers, clients or the public, and could feasibly cause property damage or personal injury to a third party while doing business, public liability insurance is a must.
A workman is only as good as his tools, and – unfortunately – tools are frequently stolen from utes and construction sites.
This is a double whammy for tradies because, not only can replacing tools cost thousands of dollars, it can take time. During which time a tool-less tradie may be out of work and out of pocket.
Tool insurance provides protection against theft and damage, for example from a fire or vehicle collision. But, coverage does vary widely between policies, so it’s important to read the fine print.
You should also make sure your ute or work vehicle is adequately covered for business use. You may need to consider Commercial Motor Insurance.
Actions may speak louder, but words still matter. And they can land you in hot water if you’re in the business of providing advice for a fee.
Professional indemnity insurance protects sole traders from third party claims arising as a result of the specialist service or expert advice they have provided.
It can cover any damages and compensation costs, as well as legal fees, should you be found to have breached your professional duty, for example by providing incorrect advice or leaking confidential information.
Sole traders who typically require this type of insurance include accountants, financial advisors, lawyers, engineers, veterinarians, architects, marketing consultants and allied health professionals, but it may also be relevant to many more.
READ: 5 money management techniques for sole traders
Nobody wants to expect the worst, but it’s smart to be prepared for it. Particularly if you have high living expenses and dependents.
Total and permanent disability (or TPD) insurance involves the payment of one large lump sum should you become permanently disabled and unable to work, due to injury or illness.
Premiums depend on factors such as age, sex, health and the benefit amount required.
Those in ‘riskier’ professions, such as builders and other trades, will typically pay higher premiums than office workers.
If you’re a sole trader that employs others, Worker’s Compensation insurance is mandatory in all states (unless you qualify for an exemption).
This type of insurance covers property damage and personal injury suffered by an employee.
A number of factors influence the cost of an insurance policy. The price you pay is dependent on the risk you represent to the insurer – in other words, the likelihood that the insurer will have to pay for a claim that you make. The lower the risk you represent to the insurer, the lower your premium is likely to be.
Following are some of the considerations that an insurer will take into account when calculating your premium.
The dollar-value of what is being insured is taken into account. Items or services with a higher value will generally cost more to repair or replace.
Some industries are considered higher risk than others. For example, construction, mining and manufacturing businesses are considered higher risk than office-based businesses in terms of workers’ physical safety.
Depending on the type of insurance, your insurer may take into account your level of experience in your profession, field or industry. The number of years you have been in business and your relative financial stability can also impact your premiums.
Your premium also accounts for relevant local, state and territory government stamp duties and levies, as well as the GST.
In the case of something like public liability insurance, your premium will be influenced by the size and physical condition of your office building or business location.
Larger premises that are open to the public represent a higher risk of third-party injury or property damage. The age and condition of the building – and building codes and standards – will be taken into account.
As a rule of thumb, newer construction is considered a lower risk than older construction.
Most insurance premiums offer a choice of basic, intermediate and comprehensive cover. The more comprehensive the cover, the higher the cost of the premium.
As with personal insurance, the insured’s claims history is likely to be taken into account when business insurance premiums are being calculated.
In the early days of running a business, applying for sole trader insurance can feel confusing and overwhelming.
Here are three things to keep in mind when your weighing up what to apply for.
Consult your industry body, or others in the same line of work, and find out what insurances they consider critical.
Insurances don’t come cheap – especially when you’re applying for multiple policies.
Take your financial circumstances into consideration and weigh up the ones that are critical versus the ones you may take out in subsequent years.
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This cannot be overstated! Before submitting your insurance application, read – and understand – the policy thoroughly.
Policies vary dramatically from one insurer to another, and each one sets its own limits, premiums, excess and exclusions. Make sure you understand what is covered under a policy – and what is excluded – before you buy it.
This advice is general in nature and not intended to substitute the guidance of a specialist. When seeking general business advice, start by looking for a qualified advisor near you.