by Tony Bates | Financial Advisor
Your ability to earn an income is one of your greatest assets, and yet only 31% of those who are self-employed and 6% of employees have income protection insurance .
Would you be able to meet your financial obligations if you are unable to work?
Income protection insurance is designed to protect your lifestyle to enable you to meet ongoing financial commitments such as mortgage repayments, school fees, and living expenses.
Income protection insurance usually pays up to 75% of your income after an accident or illness until your return to work. You can also insure your future super contributions. Our summary of income protection insurance considers the benefits, the need to find appropriate policy terms for your situation and the value of professional advice.
As a business owner, income protection insurance is especially important. When choosing your terms of insurance, you should consider the financial viability of your business as well as your personal financial obligations if you were unable to work. For example, in addition to meeting your personal financial obligations, you may also need to pay a replacement salary for someone else to look after the business temporarily.
There is a worrying trend in Australia when it comes to protecting ourselves, with 95% of Australian families not having adequate levels of insurance. The 'She'll be right' attitude doesn't correlate with reality when it comes to accidents and illnesses.
One in three Australians will be affected by an accident or illness and require time away from work for more than three months. It is estimated that 38% of working Australians would last less than a month without their income before needing to sell assets. Further, it is estimated that 20% of mortgage defaults are due to an accident or illness of a person in the household.
These confronting statistics highlight the importance of adequate protection to maintain your current and future standard of living and way of life through income protection insurance.
While many people hold income protection insurance through their superannuation, these policies generally have a limited benefit period and very basic cover. It is estimated that 45% of industry fund super fund members are underinsured by $1,000 per month for income protection. Default policies are not tailored to your specific circumstances or stage of life and can result in you being underinsured. insurance.
For true peace of mind and protection when you need it most, it's important to consider a policy that is most appropriate for your circumstances and stage of life. Policies usually specify a maximum time period or age limit for the benefit period, usually two to five years, or up to the age of 60 or 65. However, not all insurance protection policies are the same and it's important to seek professional advice.
We can tailor an income protection policy for your circumstances which may also cover additional health traumas within the policy such as heart attack, cancer or stroke. I may also be able to negotiate longer benefit periods which may not be offered through default super policies or other policies which are not underwritten.
Seeking professional advice also means that you can reasonably expect that your full entitlements will be paid should you ever need to claim, leaving you to focus on recovery without the additional stress of pressing financial commitments.
Boost your protection
If you became ill or unable to work and needed to rely on income protection insurance, at 75% of your income, would you need to make lifestyle adjustments? You can boost your income protection with trauma insurance.
Sean earns $100,000 per year and supports his wife and young daughter. He has a $250,000 mortgage of which he pays approximately 25% of his salary into repayments each year. Sean already has income protection insurance which he knows will cover approximately 75% of his annual income if he is unable to work due to an accident or illness. Sean's financial advisor recommended that he consider a trauma insurance policy of $250,000, based on his current personal situation.
Sean suffered a heart attack and was deemed unfit for work. He was able to use his $250,000 trauma cover to pay out his mortgage, reducing his monthly expenditure by 25%. Sean's income protection insurance is now sufficient to cover his other monthly living expenses without compromising his lifestyle so he can concentrate on his recovery.
It's time to get serious about income protection insurance. If you couldn't support your family or meet your other financial obligations if you were unable to work, income protection insurance should be a matter of priority.
 TNS/IFSA investigating income Protection Insurance in Australia July 2006 and CommInsure 23/1/2008
 Lifewise/NATSEM Underinsurance Report – Understand the social and economic cost of underinsurance February 2010
 TAL and FSC Under insurance key facts study 2009
 Zurich Misinsurance Whitepaper February 2014
 Mortgage default in Australia: nature, causes and social and economic impacts, Australian Housing and Urban Research Institute, March 2010
 Sweeney research. A joint report by The Australian Institute of Superannuation Trustees (AIST) and Industry Funds Forum (IFF) 2008
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.