Let’s be honest – you’re most likely not independently wealthy. To quote Donna Summer, you work hard for your money. You may not live paycheck to paycheck but you no doubt rely on your income to meet your day-to-day living expenses. If you’re lucky, you’re able to save for a rainy day. Your rainy day fund may be earmarked for a holiday or children’s school fees or a new car. But it’s probably not money set aside to keep you or your family financially afloat if something bad happens that prevents you from working.
According to an Ernst & Young study, 57% of Australians have no savings plan and nearly 20% of working Australians would be unable to find $500 – $1000 to cover emergency expenses. Even those with a steady income worry, with over 40% of respondents indicating that they fret about their ability to meet their month to month expenses. Imagine compounding that worry if you’re no longer able to work.
Chances are, if you own a home, you have home and contents insurance (many lenders won’t approve a mortgage without it). If you’re renting, you’ve probably got Contents Insurance. If you own a car, it’s a safe bet that your car insurance policy is up to date. And, if you’ve travelled overseas recently, you probably took out travel insurance. You may also be one of the 12 million Australians with private health insurance. So you insure your home, your possessions and your health, which is great, but will any of that matter if you don’t insure your income? How can you pay for your house, your bills and your food, let alone all of your important insurances, if you’re no longer able to work?
Enter income protection insurance.
What Is Income Protection?
Income protection insurance is a form of life insurance you can take out to help protect your finances if you are suddenly unable to work due to illness or injury. Income protection could pay you up to 75% of your regular income until you are able to work again, although the maximum length of time varies by insurer. Some income protection policies will insure you for being unable to work until you are 65 years of age, while others will only cover you for a maximum of two years. This depends completely on the insurer and your individual policy conditions, so make sure that you understand the specific details pertaining to you.
Commonly, income protection insurance provided through superannuation funds meets the minimum standard and therefore offers only the most basic level of cover. If you think you have income protection through your superannuation, check the policy specifics as it may be worth taking out supplementary income protection insurance to fully cover your needs.
How Does Income Protection Work?
It will pay you in one of two ways: agreed value or indemnity value.
- Agreed value is an agreed amount, based on your income, at the beginning of a policy. Agreed value policies usually have a higher premium but you will know the amount you will receive if you need to claim, even if your income has changed over time.
- Indemnity value is a payment calculated based on your confirmed, taxable income at the time of the injury or illness. Indemnity value policies are less expensive; when superannuation providers refer to their income protection product, in most cases, they are referring to an indemnity value policy.
How Much Does It Cost?
Premiums will vary based on your age, gender, occupation, and lifestyle choices. Premiums come in two different types as well: level and stepped premiums.
- Level premiums remain mostly consistent over the life of the policy. Level premiums are more expensive at the beginning but, over an extended period of time, often prove more cost effective.
- Stepped premiums are less expensive in the beginning but are reassessed and reindexed each year, and over time, are more expensive. Stepped premiums are the most common.
Devil In The Details
Like with any insurance, make sure you understand exactly what’s covered. Every policy is different, so check the policy details carefully. Factors that are taken into consideration when you apply for Income Protection include:
- Pre-existing medical conditions
- High risk occupation
- High risk hobbies and recreational activities
- High risk travel pursuits
- Lifestyle choices, such as smoking or illicit drug use
It’s very important that you disclose any pre-existing medical conditions during the application process. This is in your best interests so you know exactly what you’re covered for if you ever need to claim. In the worst case scenario, if you fail to do so, it may invalidate your insurance.
A Chance Of Rain…
Over 83% of Australians have comprehensive car insurance to protect their car, but less than 4% of households with children have enough insurance to cover daily expenses. Whether you’re single, married or have a family, you can’t rely on winning Lotto to protect your future.