You’re no doubt on top of insuring your business, but have you insured yourself?
As the engine behind it, your ability to earn an income is one of your biggest assets (even if it’s not on a spreadsheet).
That’s where personal risk insurance comes in. It protects your income if illness, injury or something more serious takes you out of action.
We’ve been digging into this topic as a team off the back of a recent session with Pat Hancock from Crest Financial, exploring how the main types of cover work in personal and business contexts.
Here’s what you need to know as a business owner.
What are personal risk insurances?
Personal risk insurance is designed to protect you (and your income) if something goes wrong with your health or life. It helps you financially manage the unexpected ‘what if’ scenarios many of us face at some point – something we’ve seen play out with clients and internally.
These situations can range from:
- Accidents, illness or injury that prevent you from working or running your business
- Serious medical conditions or disability that impact your ability to earn an income long-term
- Death or critical illness affecting key individuals in your personal or business life (where insured)
The four personal risk insurances
There are four main types of personal risk insurance: life insurance, total and permanent disability (TPD), trauma (critical illness), and income protection.
Here’s a summary of each:
Life insurance
Life insurance pays a lump sum on death or diagnosis of a terminal illness (usually where life expectancy is around 12–24 months, depending on the policy).
The lump sum benefit payment is made to beneficiaries – such as a spouse or partner, children, or another nominated person – and is designed to help cover debts, replace lost income, and support ongoing living expenses.
Total and permanent disability (TPD)
TPD insurance pays a lump sum if you become permanently unable to work because of serious illness or injury. Cover is generally defined in two ways:
- Any occupation – Unable to work in any job suited to your education, training or experience
- Own occupation – Unable to work in your specific job (more comprehensive definition)
The benefit helps support long-term financial needs, including medical expenses, income loss, and lifestyle adjustments following a permanent disability.
Trauma (critical illness) insurance
Trauma insurance delivers a lump sum payment on diagnosis of a specified medical condition such as cancer, heart attack or stroke.
It’s triggered by diagnosis, not by your ability to work. Because claims are more common than for life or TPD insurance, premiums are generally higher.
Some policies may include partial payments for less severe conditions or early-stage diagnoses, depending on the terms.
Income protection insurance
Income protection replaces up to around 70% of your income if you’re unable to work due to illness or injury.
Payments begin after a waiting period and continue for a set benefit period. This can range from short-term cover to long-term protection. It applies whether the cause is work-related or not, helping you stay financially stable while you recover.
Working out what cover you need
One of the biggest sticking points with personal insurance is simply knowing what cover is appropriate, and how much is enough.
It depends on your personal situation. At its heart, it comes down to a simple question: if you couldn’t work tomorrow, what would need to be covered to keep life and your business stable? The numbers need to still add up.
Here’s a handy checklist of factors to consider:
Financial commitments
- Outstanding debts (mortgage, loans, credit)
- Ongoing living expenses
- Future costs, such as children’s education
Dependents and responsibility
- Whether others rely on your income
- Supporting a partner or family long-term
- Your role in the household or business
Timing and life stage
- Cover is generally easier and more cost-effective to obtain earlier in life
- Premiums are typically lower, and underwriting is less restrictive when younger
- Life events (marriage, children, property purchases) can often trigger increases in cover, sometimes without full reassessment
Shared household planning
- Both partners should be considered for cover, regardless of income level
- Even non-primary earners can have a significant financial impact if they’re unable to contribute at home or in the business
Structuring and funding personal insurance (in and out of super)
Hesitant to get personal risk insurance due to uncertainty around cost and how to actually set things up? Something many people don’t realise is that some personal risk insurances – namely Life and TPD – can be set up inside superannuation.
Setting up insurance inside super means your insurance is paid for through your super fund, instead of you paying for it directly from your own bank account. This helps make it more affordable and easier to manage.
But it’s important to understand the trade-offs in flexibility, tax treatment and long-term impact on your super balance.
Inside super (Life and TPD only)
Pros
- Premiums are generally more affordable as they’re paid from super
- Can be tax-effective in certain situations
- Easy to set up through an existing super fund
- Default cover often included without needing to apply
Cons
- Less flexibility in how cover is structured
- TPD is usually limited to ‘any occupation’ definitions (harder to claim)
- Benefits paid before age 60 may be taxed
- Cover may reduce over time (unitised policies)
- Can be cancelled if super account becomes inactive
- Less control over policy features and beneficiaries
Outside super
Pros
- Greater flexibility and more tailored cover
- Broader policy definitions (e.g. TPD ‘own occupation’ options)
- Trauma cover available (generally not suited to super)
- Full control over structure, ownership and beneficiaries
- Not dependent on super fund rules or activity
Cons
- Premiums are paid directly from your income
- Can feel more expensive upfront
- Less ‘set and forget’ than super-based cover
Personal insurance in a business context
Personal risk insurance isn’t just about protecting individuals. It’s also a key tool for business continuity and risk management. Here’s how:
Key person insurance
Key person insurance is used when your business relies on critical individuals. If that person dies or becomes seriously ill, the payout can help cover:
- Lost revenue
- Recruitment and training costs
- Operational disruption during replacement
Buy-sell agreements
Buy-sell agreements help fund ownership transitions between business partners. If an owner dies (life insurance), becomes permanently disabled (TPD insurance), or suffers a specified critical illness (trauma insurance), the policy can:
- Fund the purchase of their share
- Prevent forced asset sales
- Reduce disputes between remaining owners and family members
Business liquidity support
Business liquidity support is a broader business funding concept, rather than a standalone insurance. It provides cash when assets aren’t easily accessible. A payout can be used to:
- Meet short-term financial obligations
- Avoid selling assets under pressure
- Stabilise cash flow during disruption
Business owner insurance funding and structure
Premiums for personal insurance in a business context are typically paid by the business or split between owners under a shareholder or buy-sell agreement, ensuring costs are clearly defined upfront.
Ownership is then aligned to purpose, either:
- Held by the business for operational protection
- Held by owners to fund future equity transfer
This ensures that when a claim happens, funds are already structured correctly and can be used immediately for buyouts, debt repayment or business stabilisation without delays or funding gaps.
FAQs – Personal insurance practical guidance
Here are some common questions that came up in our training about policy maintenance, group cover, and the importance of regular reviews and beneficiary nominations. We thought they might be helpful to wrap things up.
What happens to my policy if I make a trauma claim?
If you make a trauma claim, some policies can be reinstated, but they may include exclusions related to the original condition. In some cases, you might have buyback options, letting you reinstate life or TPD cover after a claim.
What’s the difference between stepped and level premiums?
Stepped premiums generally increase as you get older, while level premiums are designed to be more stable over time. Even so, you should review both regularly, as pricing structures can change over time – and what suits you now may not suit you later.
Can I get group income protection outside of super?
Group income protection is usually only available through employer superannuation funds and isn’t usually offered as a standalone group policy.
How does default insurance in super work?
Many super funds offer default cover automatically, but depending on the fund, you may need to opt in or out. Make sure you check your fund rules, as cover can vary over time.
Can my insurance inside super be cancelled?
Yes. If your super account becomes inactive (for example, no contributions for a period of time), your insurance cover may be reduced or cancelled. It’s worth keeping an eye on, so it doesn’t quietly disappear on you.
Who gets my insurance or super benefit when I die?
Insurance and super held inside super don’t automatically form part of your estate. You need an up-to-date binding beneficiary nomination to ensure the benefit is paid to the person or people you intend. Without this, the super fund trustee may step in and make the call for you.
Should I review my insurance regularly?
Yes! You should go over your cover regularly to ensure it still reflects your circumstances, especially after major life changes like buying property, having children, or changes in income.
Paying for personal risk insurance? Worth it
While personal insurance does come at a cost, it’s important to weigh that against your own circumstances and the potential impact of an unexpected event.
Having the right cover in place means you’re protected from financial pressure if a health issue, accident, or other life event takes you out of work, helping you stay in control when things don’t go to plan.
How it’s structured and put together also matters, as this can influence how effectively it supports you when you need it most.
Ultimately, it’s about making sure you and the people who depend on you aren’t left exposed at the worst possible time.
