Your most valuable asset is your ability to earn an income. The income you earn over a lifetime is worth more than any other asset, yet most people would put more importance on insuring their car rather than insuring themselves.
Have you ever wondered how all your bills would get paid if you were forced off work with an extended illness? This becomes more apparent once you have a $300,000 mortgage to pay and your paid sick leave only covers you for a few weeks at best.
What is Income Protection?
Income Protection will cover up to 75 percent (some policies can offer higher) of your salary for a period if you’re temporarily unable to work because of sickness or injury (anything not allowing you to continue your work). There is no actual list of events in which you can claim, it is essentially anything that stops you from working, providing very broad protection.
You will continue to receive 75 per cent of your income until you return to work or to the end of the benefit period. Income protection should not be considered a safeguard for short term illness. It should be viewed as providing cover for an extended inability to work. This should also not be confused with salary continuance insurance that is offered through superannuation.
What are the options with Income Protection
There are some variables to consider when setting up your income protection. These have to be carefully planned as they are important to get right. Three main options will determine the makeup of the income protection:
Agreed Value or Indemnity policies
Agreed Value policies will (once approved and setup) honour your policy benefit (eg $2,000 p/month) even if your salary drops at a later stage to only $1,500 p/month. This is true as long as you continue to pay the premiums and do not let the policy lapse. Indemnity policies are less common but can be more suited to self-employed individuals where it may be harder to provide evidence of earnings up to the amount you wish to insure for. If a claim is lodged under this type of policy, the provider will look at your last 12 months earnings and calculate a benefit based on this.
The benefit period simply outlines how long you will continue to be paid under the policy cover.
The waiting period should be extended to as long as possible to match with your financial position, such as sick, and long service leave.
How much does Income Protection cost?
Income Protection insurance can be more expensive than Life Insurance, but the income protection premiums are tax deductible. Benefit payments, however, are considered income and therefore subject to tax (at marginal tax rates). Income Protection Insurance premiums vary according to the following:
- Age (premiums may increase or cover decrease as you get older)
- Gender (rates for females are higher than males)
- Whether or not you smoke
- Occupation (manual based work attracts higher premiums than office work)
- Waiting period – the time you choose to wait before receiving payment
- Benefit period – how long you will receive payments in the event of a claim
- Agreed or Indemnity style policy
- Minimum working requirements
- Any extras chosen like ‘Increasing Claims’ etc