Income Protection
What is your greatest asset?
Many people consider their greatest asset to be their home or possessions. Truth is, these assets would simply not exist if Australians and their families did not have a consistent, reliable income. It pays for everything that may be important in people’s lives – their future, lifestyle, family and education, home, and preparing for retirement. Most people insure their home and contents but fail to protect their greatest asset against illness or injury, their income.
What is Income Protection? 
Income protection insurance provides a regular (usually monthly) taxable income in the event that someone becomes sick or injured. You can generally insure up to 75-80% of your current income including super contributions. This insurance can provide you with protection until you retire. Income protection cover ensures that assets are not sold or spent to replace lost income, protecting the lifestyle people have worked hard to build. The two key areas you nominate with an Income Protection policy are the:
Waiting period – The ‘waiting period’ is the time between you becoming unable to work and receiving your first income protection payment. You can generally choose a waiting period between fourteen days and two years. A shorter waiting period usually means a higher premium. The most popular waiting period is 30 days however the payments are made monthly in arrears so the first payment is actually 60 days after you become unable to work. You should consider what waiting period is appropriate to you based on sick leave entitlements, funds you may have in reserve and how long you think you can manage without your regular income without placing financial strain on yourself and you family.
Benefit period – The benefit period is the period during which you receive your income protection payments. You can generally choose between a two or five year benefit period or up to age 65 or 70. The most popular waiting period is to age 65-70 as people ensure that they have protection up until their expected age of retirement. This also ensures that if a person is unable to work ever again then income will continue to be paid until their expected retirement age which will also help to save for their retirement when payments will cease.
Many people believe private health cover is all that is required in the event of illness or injury. While it is important in providing treatment to optimise recovery, it does not replace lost income. It also does not fund mortgage payments and it does not provide for one’s lifestyle.
Why is it so important?
In the recent 2007 AXA Protection Report it was found that Australians feel less concerned than most other people in the world about life risks, such as serious illness, accidents and disasters. It also found that Australians have a false sense of security when it comes to their insurance needs. This she’ll be right’ attitude, while an important part of Australian culture, also means that the majority of Australian’s are drastically underinsured and under prepared for life’s risks.
Around 50% of Australians aged over 30 will sufer a major illness that can lead to a long-term disability and long-term loss of income (National Centre for Social and Economic Modeling, Income and Wealth Report, Issue 4, March 2003).
We all think suffering from a prolonged illness or injury will not happen to us, but the truth is, it can happen to any one of ustoday. The reality of this hit home very recently. A valued client of ours, a 33 year old male, suffered three strokes and has been partially paralysed. By having income protection in place at the time of his stroke, his young family are safe in the knowledge that they will be able to cope with this uncertain and stressful time. Income protection allows them to meet their financial commitments and not have to worry where the money is going to come from. In fact if the client is not able to return to work again, he will be paid replacement income for the next 32 years!
The client also had the foresight to take out trauma insurance for the sum insured of $800,000. Trauma or recovery insurance pays a lump sum on the event of a determined critical illness and is designed to provide money when you need it most. Most people use the money to cover additional medical costs and treatment, reduce debt or make a permanent lifestyle change such as reducing working hours, so they can spend more time with their family.
An important part of any prudent person’s wealth creation plan is to manage the risks. What would happen if you and your family lost your income for a month, a year or the rest of your life? How would you cope? What plans have you made? What assets might have to be sold? What reduction in lifestyle is required? What do you want to tell your spouse and family if the unfortunate occurs? That you have prepared for this day?
While a balanced protection plan in the event of death, total and permanent disablement (TPD) and disability is important, the cornerstone of any wealth protection plan is protecting income. It is considered one of the most important financial investments a person can make – that is, protecting your unique skills and ability to provide a future income. What’s more, income protection is affordable and the premiums are tax deductible.
Care4Wealth has developed a range of calculators to help clients understand the risks associated with premature death, TPD and disablement and to estimate the value of future income that needs to be protected. What most people never understand is just how much their future income is worth.
Case Study
Take for instance a 30 year old white collar professional male earning $100,000 who takes out Income Replacement Protection. The cost would be approx $75 per month or $46 per month after claiming a tax deduction1. That’s only $1.50 a day to protect a six figure salary! Now, if the client was totally disabled one month after the policy was taken out and never able to work again, the policy would continue to pay for the next 35 years. That’s over $5 million paid out! In addition, while on claim the sum insured will be indexed each year to keep pace with inflation with no ongoing premiums to pay.
As we get older the chances of suffering an illness that will lead to disability increases significantly. Because of this increased risk the cost of insurance cover also increases with age. What most people do not realise is that unlike insuring your home or car once an insurer accepts your life cover, they guarantee to renew it each year no matter how serious your health problems – as long as you continue to pay your premium. Therefore if you suffer a serious illness before you are covered you may not be able to get the insurance you need. Getting cover while you are healthy is likely to be the best decision you ever make.
What is also a little known fact is that you can save tens of thousands of dollars by locking in your premium at your current age, thus insuring the policy does not increase each year with age.
We live in a time where Australians are taking on more debt via mortgages, cars and credit cards. Add to this the increasing uncertainty and volatility in world markets and we are more vulnerable than ever before to untimely accidents or illness.
She may well be right in the end’ – but smart Australians, young and old, are improving the odds by protecting their greatest asset, their income.
The information used in this website is of general nature only and is not intended as a personal advice. It does not take into account your particular investment objectives, financial situation and needs. Before making a financial decision you should assess whether the advice is appropriate to your individual investment objectives, financial situation and particular needs. We recommend you consult a professional adviser who will assist you.
You should also obtain a copy of and consider the Product Disclosure Statement (PDS) for any financial product mentioned before making any decision to acquire a financial product.
1Cost based on monthly premium of $45-95 after tax deduction (marginal rate of 38.5% including Medicare levy) for an agreed value One Path Income Secure Comprehensive Policy, stepped premiums for a degree qualified accountant, 30 year old male, non-smoker, with a monthly benefit of $6,250 (75% of income), waiting period of 30 days and benefit period to age 65. QLD stamp duty included. CPI 3.5%. Premium current as at March 2013. This is not a recommendation and the insurance company selected for quotation was done so randomly.
