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.
Most policies will pay up to 75 per cent of your average monthly income (net of business expenses but before tax), and will cover you against various conditions, which could disrupt your ability to earn an income.
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.
What should I pay for income protection insurance?
Income protection premiums vary greatly across the market place depending on the level of protection you are after.
Premiums are set depending on:
•Age – The cost of obtaining cover generally increases over time
•Health and pre-existing conditions
•Whether or not you smoke – If you are a smoker, or if you have smoked within the last 12 months you will pay more in premiums compared to a non-smoker. However should you already have a policy and premium based on smokers’ rates and you have not smoked in the last 12 months you may be able to have your premiums reduced back to non-smokers rates.
•Occupation – If you are involved in a hazardous occupation or where there are more risks involved, you will pay a higher premium compared to a professional office worker.
•Waiting period – How long can you be off work before you require the income to commence. Generally the waiting periods range from 2 weeks to 2 years.
•Benefit Period – This is the maximum length of time following the waiting period that the policy will pay the benefit for. These can either be for a set period (2 year, 5 year) or until a certain age (to age 65). If you are able to return to work because you have recovered from your sickness or injury then the monthly benefit will cease at that time.
•Additional policy features – Whether you would like a ‘comprehensive’ or ‘basic’ policy or any additional features will also affect the cost of cover.
For most taxpayers premiums are tax deductible and the income received during claim is taxable.
If you would like further information on the products we offer or would like a quote on Income Protection Insurance please contact us.