Consider cover for your most important asset – your ability to earn.
One of the reasons people say they don’t have income protection is the perceived cost. But if you were to lose your ability to earn you might regret not having cover, or not having enough cover.
Sadly, one in five Australian families will be impacted by the death of a parent, a serious accident or an illness that renders a parent unable to work.i
These are sobering statistics given that only 31 per cent of Australians have income protection insurance.ii
Who needs it?
Income protection insurance comes into its own when you have commitments like a mortgage and a family. It is particularly helpful if you are self-employed and rely solely on your ability to work to earn an income. But it is also useful for employees as the cover will kick in once your sick leave runs out.
Insurance can mean the difference between maintaining your current lifestyle or defaulting on your mortgage and having to take your children out of private school. It can also give you peace of mind at a stressful time.
Most income protection policies pay up to 75 per cent of your salary for a negotiated period of time. This is often for two years although you can opt for payments up to the age of 70. What you choose will determine the cost.
You also need to decide whether to have a waiting period and, if so, for how long. For instance, if you are an employee it might make sense to wait 90 days or until you exhaust your sick leave entitlements. This will lower your premiums.
Lots of decisions
Timing is just one of the issues you need to address. There are other decisions to consider including whether to hold the policy inside your super fund or outside.
The key benefit of holding income protection inside super is that paying the premiums will have no impact on your cash flow; premiums can be funded from your employer contributions or your account balance. However, deducting premiums from your super will reduce your retirement savings.
If you hold income protection outside your superannuation fund you can pay premiums 12 months in advance and offset the expense against this year’s tax.iii
Stepped, level or mixed premiums?
Stepped premiums start low, but increase over time; level premiums are constant throughout the life of the policy although there may be minor annual adjustments for inflation. Mixed premiums allow you to blend the two within or across cover types. For example, you could have life cover that is 50 per cent stepped and 50 per cent level, or trauma cover stepped and life cover level.
If you are only looking for short-term cover for five to 10 years, then stepped might be cheaper; if you are expecting to maintain your cover for about 20 years, then you could choose level or mixed premiums.
This is because after 10 years the stepped premiums in dollar terms become more expensive than level or mixed premiums and you will end up paying more overall.
Agreed value or indemnity? With agreed value, any payout is determined at the time you take out the policy. With an indemnity policy, the insurer generally looks at your level of income in the 12-24 months prior to the claim. Agreed value is usually preferable if you are self-employed and your income fluctuates from year to year
If you have financial responsibilities and depend on your ability to earn an income, you can’t afford not to insure.
Call us if you would like to discuss your income protection needs.
i http://www.lifewise.org.au/downloads/file/aboutthelifewisecampaign/ 2010_0203_LifewiseNATSEMSummaryA4FINAL.pdf