Income Protection

What is income protection insurance?

What is your greatest asset?
Most people typically respond that their home, their car, or their investments are their greatest assets. However, your greatest asset is actually your ability to earn an income.
Most of us rely on our income to pay the mortgage or rent; to keep ourselves and our families clothed and fed; and maintain a comfortable standard of living. So protecting our ability to earn an income should be a high priority. Yet, while many of us insure our homes and possessions, we often ignore protecting our income. An income protection policy will pay a regular income if you are unable to work because of sickness or injury. Whether the disability is as serious as cancer or as minor as a broken arm, income protection provides a simple, cost-effective safety net.

Income protection is particularly important to the self-employed, who cannot rely on short-term sick leave from an employer.

How does income protection work?

Income protection insurance provides an income stream for you should you become unable to work due to an injury or illness. In the event of a claim, the insurer will pay an amount (normally up to 75% of your gross salary in Australia) until you have recovered sufficiently to work again, or up until the maximum benefit period as stated in the policy which is normally 2 years, 5 years or up to age 65.

Why do I need income protection insurance?
Ask yourself what would happen if you woke up tomorrow and found you were incapable of working for an extended period of time. Could you survive without your income for an extended period of time (12 months or longer)?

Income protection insurance provides cover for individuals, 24 hours a day, anywhere in the world. If you don’t have savings how could you support your household, repay your mortgage or save for the future? You may think Workers Compensation will cover your costs in the case of an accident, but Workers Compensation only protects you if your injury is connected with work.

How much income protection cover do I need?

The amount of income protection cover you need will be determined by your salary. In Australia the maximum amount of cover you can get is usually limited to:

  • If you are employed: 75% of your current gross salary (including employer packaged fringe benefits and superannuation contributions).
  • For self employed: 75% of the income generated by the business due to your personal endeavor less your share of expenses.
  • A lower percentage of income may apply above certain income limits ($250,000 for example) and overall maximum levels of monthly benefit sum insured will apply.

You need to consider what the costs are of meeting your debts (mortgage, etc.); providing sufficient funds for a spouse, children or other dependents; and maintaining your assets & investments. Remember, the point of income protection insurance is to provide an income stream if you can no longer work.