It is often said that your ability to continue earning income is your most significant financial asset. Our recommended financial plan is largely dependent upon your ability to derive an income and that your budget will not severely alter as times goes on.
If you should become injured or unable to work for any reason your financial plan may be compromised.
Income Protection insurance provides you with an ongoing benefit in the event that you are unable to work at full capacity due to illness or injury, and effectively replaces a portion of your normal income.
It protects your most important valuables – you, your family and your ability to earn income.
It enables the mortgage to be paid, daily living expenses to be met, and allows the lifestyle that we enjoy to continue.
An individual earning $80,000 per annum will earn more than $2.6 million over the next 20 years (allowing for inflation). This income, which is usually an individual’s greatest asset, needs to be protected.
Premiums are fully tax deductible and can be paid monthly, quarterly or annually.
Workers compensation will only cover you for accidents or injuries that occur during work hours or for an illness that is a direct result of your employment. Less than 25% of your time is spent at work so there is no workers compensation coverage for the other 75%.
A comprehensive Income Protection policy will provide replacement income up to a level of 75% of normal taxable income, during a period of temporary sickness or illness or in the event of a longer-term absence from work.
It covers you whether you are at work or not.
Some policies also enable you to increase the level of cover to be inclusive of the SG (Superannuation Guarantee) Superannuation contributions which would have been made by your employer upon your behalf.
There are several key terms associated with Income Protection insurance which we discuss below to enable you to better understand our recommendations.
The Benefit Period is the duration for which the benefit is payable for. The Benefit Period will generally range between one year and ‘To Age 65’. Generally the longer the benefit period is, the greater the premium.
In recognition of the fact that many individuals have access to cash reserves or sick leave entitlements, a Waiting Period reflects the period of time from date of accident that you must wait prior to receiving the nominated benefit. Generally, the longer the waiting period the cheaper the premium.
Real Life Example 1:
Stephen had arranged income protection for a client Andrew (along with other life and trauma insurances required). Andrew was struggling with the family’s cash flow and cancelled the income protection without consultation.
Within 6 months, on Christmas Day Andrew had a motorcycle accident and suffered a shoulder injury. He didn’t initially miss much time at work but did have an operation 12 months later and probably was not able to take off enough time after the operation to recuperate because he couldn’t afford to be away from work.
Real Life Example 2:
Stephen had arranged income protection for a self-employed client Sean (who had life and TPD insurance within his superannuation fund). Due to cash flow issues he cancelled the policy.
Shortly after this at the age of 50 Sean was diagnosed with cancer, serious enough that he had to close his business down and is no longer able to work. Luckily he was able to receive a lump sum TPD payout from his super fund but instead of enjoying these funds for his retirement he has to use them to meet existing liabilities and provide income.
If Sean had maintained his income protection cover he would continue to receive his monthly income benefit which would mean the TPD lump sum payment could be set aside for other uses.
This information is of general nature only and is not intended as a personal advice. It does not take into account your particular investment objectives, financial situation and needs. Before making a financial decision you should assess whether the advice is appropriate to your individual investment objectives, financial situation and particular needs. We recommend you consult a professional financial adviser who will assist you.