Your ability to earn an income is likely to be the largest asset you will ever own. Over a working life, it funds your home, your family, your lifestyle and your superannuation. Yet many Australians insure their car, their home and even their phone without giving the same thought to protecting the income that pays for them all. That is why income protection insurance deserves a place in almost every financial plan.
What is income protection insurance?
Income protection insurance pays you a regular monthly benefit if illness or injury stops you from working, either fully or partly. Most policies pay up to 70% of your pre-disability income, and some also include a component to help keep your superannuation contributions going. It is designed to replace the pay cheque you would otherwise have lost, so that you can focus on recovery rather than on how to meet the mortgage, rent and everyday bills.
It is different from life insurance, which pays a lump sum on death or terminal illness, and from total and permanent disability (TPD) insurance, which pays a lump sum if you are unlikely to ever return to work. Income protection is about the far more common situation of being unable to work for weeks, months or years.
Why does it matter?
Most of us know someone who has been off work for an extended period because of a serious illness, a back injury or a mental health condition. Sick leave and workers compensation only go so far, and workers compensation generally covers injuries connected with your job. Without cover, you may be forced to draw down savings, sell investments or access your superannuation early, which can set back your long-term plans significantly.
For younger people building wealth, or first home buyers carrying a large loan, the risk is especially real: the debts are high and the savings buffer is often still small. For those in their 50s and early 60s, a period without income can undermine years of retirement planning and reduce the final balance of their super.
Key features to understand
Not all policies are the same, and the details matter. Some of the main features to consider include:
Waiting period: the time between becoming unable to work and the first benefit payment. Common options are 30, 60 or 90 days, and a longer waiting period generally lowers the premium. Your sick leave and savings can help you decide what suits you.
Benefit period: how long payments continue, commonly two years, five years or until age 65 or 67. A longer benefit period offers more protection but costs more.
Definition of disability: how the insurer decides whether you are unable to work, including whether it considers your own occupation or any occupation you could be suited to. This can make a significant difference at claim time.
Partial or income-based benefits: some policies pay a proportion of the benefit if you can return to work part-time or at reduced hours.
Premium structure: stepped premiums start lower and generally rise with age, while level premiums start higher but are designed to increase more gradually. Which is better depends on your circumstances and how long you expect to hold the policy.
Exclusions and loadings: pre-existing conditions, certain activities or occupations may be excluded or attract a higher premium.
Tax and holding cover through superannuation
When you own income protection outside superannuation, the premiums are generally tax deductible, because the benefits you receive are treated as assessable income. This can reduce the effective cost of the cover, depending on your marginal tax rate. Policies held inside superannuation are generally paid for by the fund, which may help with cash flow, but they reduce your retirement balance, and the terms of cover can be more limited. Each approach has advantages and drawbacks, and the right choice will depend on your goals and budget.
How much cover is appropriate?
There is no single right answer. A good starting point is to consider your income, your essential expenses, any debts, your family situation, and what other support you might have, such as employer sick leave, a partner’s income or savings. Cover is usually available up to around 70% of your income, and it is worth reviewing as your life changes, such as after a promotion, a new home or the arrival of children.
Making it part of your plan
Insurance is not about expecting the worst; it is about making sure the rest of your plan can still work if something goes wrong. Whether you are building wealth, buying your first home or approaching retirement, protecting your income helps safeguard your investments, your super and the people who depend on you.
At MLS Financial, we have provided holistic advice for over 20 years, guided by service, care and integrity. If you would like to understand whether income protection is right for you, or would like your existing cover reviewed, speak with one of our advisers today.
Written by:
Adrian Guy – BBus (Finance & Economics), MLS Financial
Disclaimer:
This information is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider speaking to a qualified financial planner before making any financial decisions. MLS Financial and Infocus Securities Australia Pty Ltd do not accept responsibility for actions taken based on this content.