Andrew Zbik
Is your car insured? Over 83% of Australians say ‘Yes’. Is your home insured? Probably. Is your largest income producing asset insured? Probably not.
Research collated by Lifewise.org.au shows that only 31% of Australians have income protection insurance[1].
Let’s think of it this way; the average income in Australia is around $78,000 per annum. For a person aged 30 today who is expected to work to age 65, they will earn a total $5,168,120[2] during their working life.
Income protection insurance will replace up to 75% of your monthly income in the event that you are injured or ill and cannot go to work. Protecting your largest income producing asset – yourself – just makes sense. Plus, the premiums are tax deductible.
The question needs to be asked, if you became injured or ill and you are unable to work, how long would it be before your cash savings or credit cards run out? The average client I work with says that after 2-4 weeks of sick leave and savings they may be able to last for about 3 – 4 months before they would run out of cash. This question will determine what waiting period you need for an income protection policy.
Most policies will pay the benefit one month in arrears. Thus, if your cash savings and sick leave balance will last you four months, it would be appropriate to choose a waiting period that suits you. Income protection policies allow you to choose the waiting period before a benefit will be paid.
The waiting period varies from 14 days, 30 days, 60 days, 90 days, 180 days, 1 year to 2 years. So for the example above, a waiting period of 90 days would be appropriate. In simple terms, the longer the waiting period the cheaper the policy.
It is then possible to choose how long your benefit period will be. This is how long the insurance policy will pay you a monthly benefit. This benefit period generally varies from 2 years, 5 years or to age 65 or to age 70. For most of my clients, I recommend a policy that provides a benefit to age 65. This means we have truly protected their income for their working life.
It is also possible to choose to have your income protection policy paid by your superannuation fund or by yourself individually. The benefits of paying for the policy directly is that you maximise the tax deductions on the premium at your marginal tax rate and any benefit upon successful claim is paid directly to you. Having the policy paid by your superannuation fund obviously saves money from your own pocket but any benefit would be paid to your superannuation fund first. You will then need to meet a ‘condition of release’ to get your benefit out of the super fund. This may be difficult if you have a short-term injury or illness.
I say to my clients that it would be negligent of me to advise them to purchase investments if an injury or illness stopped their ability to earn an income and they could no longer afford to hold those investments. In summary, every Australian needs to protect their number one income producing asset – themselves.
Better still, find an adviser that will advise on income protection insurance and will rebate the commissions to you, so you know it’s not just about selling a product, it’s about protecting your income as part of a greater strategy.
By Andrew Zbik, Senior Financial Planner
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[1] www.lifewise.org.au
[2] Based on future value of periodic payments. Starts with $78,000 annual income indexed annually at 2.00% over 35 years.
