Income protection for sole traders: What you need to know
Sole traders need to know pretty much everything. From managing marketing, cash flow, legal matters and even the insurance side of things, you can be juggling a lot. It can feel like you’re constantly switching hats, and it's important to stay on top of everything to keep your business running smoothly.
With more than half a million sole traders working in New Zealand, the first thing we have to say is: hat’s off to you!
The second thing is: have you heard about income protection insurance?
Understanding income protection insurance for sole traders
Of the many types of insurance available to you as a business owner, income protection insurance is just one option. However, it can be a pretty important one.
Considering you are your business, a serious sickness or injury could stop your flow of income for an undetermined amount of time.
Income protection insurance can essentially be a plan B. It can help to provide a steady cash flow into your account, even if you are unable to work. However, our Generation Debt survey recently showed that more than seven out of 10 Kiwis do not have income protection insurance.
Furthermore, only one in six of those surveyed said they had savings for extended periods without income.
Types of sole trader income protection insurance
There are of course plenty of types of insurance designed to help protect sole traders. A chat with your financial advisor is usually a good way to determine which is best for your needs, but it won’t hurt to start with an understanding of what each type offers.
Here are some of the common ones:
- Income protection insurance: Covers an amount of your lost income following a serious injury or sickness
- Business expense insurance: Pays fixed business costs if you are unable to work
- Key person insurance: Protects your dependents or business partners if you, as a key employee, become injured or seriously ill, or pass away
How income protection differs for sole traders vs. employees
Most of us don’t start out as sole traders or may be stepping into it for the first time after working in a more traditional job where things like insurance are already taken care of for you. It’s a big shift, and it can take some time to get used to managing all the extra responsibilities.
As a quick guide for anyone new to the sole trader world, here are some of the key differences in income protection when you’re an employee, vs when you’re employing yourself.
| Factor | Sole Traders | Employees |
| Access to Benefits | Generally, must buy own income protection insurance | May have employer-provided sick leave or group insurance |
| Income Verification | Need to provide financial records (tax returns, profit/loss statements) | Employer verifies income through pay slips |
| Policy Flexibility | More tailored policies available to account for income fluctuations | Standard policies based on salary |
| ACC Cover | Covers accidents, but generally not illness or lost income due to illness | Some employees may receive sick leave benefits |
| Premium Costs | Can be higher due to lack of employer subsidies | Can be lower if employer covers part of the cost |
What events qualify for making an income protection claim?
There are thousands of Kiwis who find themselves unable to work due to sickness or injury every year. The question is, are they covered?
The exact events that qualify for an income protection claim will depend on your provider, so be sure to read the fine print before signing any dotted lines.
That said, these are some of the main events that this type of insurance can often cover:
- Arthritis
- Chronic obstructive pulmonary disease
- Cancer
- Epilepsy
- Health attack
- Mental illness
- Parkinson’s disease
- Rheumatoid arthritis
- Amputation
- Back injury
- Brain injury
- Broken arm or leg
- Burns
- Hearing loss
- Loss of vision
- Nerve damage
Importantly, check your policy document for any exclusions that you should be aware of.
Selecting the right income protection policy
Selecting the right income protection policy is a personal decision and one that should be given the level of detail and thought that it deserves.
It should include comparing income protection insurance policies, determining what you need, and finding the best match. And of course, part of that is getting a quote – consider starting here with OneChoice Income Protection Insurance.
All information is general and not intended as a substitute for professional advice.
7 Apr 2025