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The idea of insuring against loss of income is one that has clear value. But many neglect to insure their most valuable asset. Income protection could be the answer – so how does it work?
We happily insure our homes, our vehicles, even our smartphones.
But have you considered how your family’s lifestyle would be impacted if the main breadwinner was suddenly unable to earn an income due to injury or illness?
According to Lifewise, a body coordinated by the Financial Services Council, 83% of Australians insure their cars but only 31% insure their ability to earn an income.[1] One obvious solution is income protection insurance – here’s how it works.
In a nutshell, income protection insurance can provide a percentage of your income for an agreed time if you have to stop work or you can only work in a reduced capacity due to injury or illness.
Income protection typically covers up to 75% of your salary earnings (or, if you’re self-employed, generally up to 75% of the business profits you’ve generated) until you can work again.
Policies typically don’t only offer cover for a specified list of conditions, as trauma insurance might. This means the cover is broader and can protect you against a wide range of health problems – from back injuries and serious illnesses to stress and other psychological issues.
If you make a successful claim, the income stream from your policy kicks in after an agreed waiting period. Typically, this is 30 to 90 days after the event. You may choose a longer waiting period – for instance, if you know that your first few months will be covered by annual leave and sick leave entitlements. A longer waiting period generally means you pay lower premiums. Shorter waiting periods are possible, but may attract higher premiums.
Similarly, the income stream lasts for an agreed maximum period – perhaps 12 months, two years, or until you turn 65. Shorter periods will generally attract lower premiums. This is one of the reasons why income protection policies are so useful, because they can be customised to your specific needs.
Also, your income protection premiums are usually tax deductible, unless you’ve taken out cover through your super fund (in which case they are generally tax-deductible to your fund). However, if you make a claim, your benefit payments will generally be taxed at your marginal tax rate.
So is income protection insurance right for you? That question is often answered by asking another one – how would your life be affected if you had no income? Imagine the result, six months from now, if today your income suddenly and unexpectedly dried up. Then imagine the difference if instead, after one month, an insurance provider started regularly paying 75% of your income into your bank account.
For many Australians, income protection insurance is one of the essential ingredients of a solid financial plan. Book a free initial consultation with a Verve Group financial adviser to see how you can begin planning for your future today.
[1] http://www.lifewise.org.au/facts-research
Important information
This document has been prepared by Count Financial Limited ABN 19 001 974 625, AFSL 227232, (Count) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. ‘Count’ and Count Wealth Accountants® are trading names of Count. Count advisers are authorised representatives of Count. Count is a Professional Partner of the Financial Planning Association of Australia Limited. Information in this document is based on current regulatory requirements and laws, as at 30 January 2018, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Count, its related entities, agents and employees for any loss arising from reliance on this document. This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision. Taxation considerations are general and based on present taxation laws, rulings and their interpretation and may be subject to change. You should seek professional tax advice before making any decision based on this information. Should you wish to opt out of receiving direct marketing material from your adviser, please notify your adviser by email, phone or in writing.