"My partner and I are currently living from one income with three dependents. I would like to know more about how income protection insurance works and how it would benefit me and my family."
- Question from Brooke in Boonah, QLD
Top answer provided by:
Declan Thomas
Hi Brooke,
That single income is the driving force keeping the lights on, tummies full and providing your family the ability to enjoy some of the finer things in life.
I encourage you to add all that income up that you can expect to earn over your lifetime, it should be a considerable figure, and this is what you would be protecting through income protection insurance.
The scenario where you lose that single income because one of you is unwell creates challenges. Insurance is a safety net after all, so put yourself in a situation where that income is unavailable to you for 2 years, how do you get by?
-Can you rely on friends or family?
-Can you rely on investment income?
-Do you have enough sick or annual leave?
-Can your partner return to work and earn a similar level of income?
-Could you rely on the government handouts to get by?
If the answer to these questions is no, then it’s highly likely you need income protection cover.
With income protection you can insure up to 70% of your income to be paid if you are sick or injured, unable to return to work and are under the care of a doctor.
The policy won’t pay out where you have inflicted the injury or illness yourself, or where you decline medical treatment.
The income protection product will have different features that will impact the premiums you pay and benefit you received on claim, generally the most important are:
Benefit Period: This is how long you would be paid for if you met the conditions of claim, typically the benefit periods are set at 2 years, 5 years or through to age 65. The longer the benefit period the more expensive your cover.
Waiting Period: This is how long you would have to be off work due to illness/injury before you would be eligible for payment under the policy. People often link this to their annual and sick leave entitlements or to their level of emergency savings. The most common are 30- or 90-day waiting periods. The shorter the waiting period the more expensive your cover.
Claims Indexation: This is an additional paid feature that ensures your income protection monthly payments keep pace with inflation over time, especially important for long term claims.
Income protection claim payments are taxable income, and the premiums are tax deductible, so generally it is best to own the policy personally from a tax perspective, especially so if you are a high-income earner.
Where cashflow is tight, you can own the policy in your superannuation fund, but the drawbacks to this are:
1. You may not receive as much back from the tax deduction as the super tax rate is capped at 15%.
2. There may be more conditions you need to meet on claim as the policy must comply with additional superannuation legislation.
You should be aware that pre-existing injuries are typically unable to be covered and you will face medical underwriting when taking a policy out. You may also have some cover in your superannuation fund currently, worth checking.
Income protection is only one part of an effective safety net, and I encourage you to explore your death, income protection, permanent disability and traumatic event insurance needs as well as they are all related.
Your first call should be to speak with an insurance focused financial adviser to get quotes for coverage and discuss the appropriate structure for your circumstances. Some of the benefits of using an adviser are:
-Typically cheaper premiums than what is available in group policies
-Ability to consider multiple insurers and policy term that meet your needs
-Ensure you get sufficient coverage for your family needs and goals
-Improved tax efficiency from structuring the insurance
-Costs of advice can typically be met through product commissions
-Ongoing review services and support when lodging a claim
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.
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