How would your life be affected if you had no income?

The idea of insuring against loss of income is one that has clear value. But many neglect to insure their most valuable asset. Income protection could be the answer – so how does it work?

We happily insure our homes, our vehicles, even our smartphones. But have you considered how your family’s lifestyle would be impacted if the main breadwinner was suddenly unable to earn an income due to injury or illness?

According to Lifewise a body coordinated by the Financial Services Council, 83% of Australians insure their cars but only 31% insure their ability to earn an income.i One obvious solution is income protection insurance – here’s how it works.

In a nutshell, income protection insurance can provide a percentage of your income for an agreed time if you have to stop work or you can only work in a reduced capacity due to injury or illness.

Income protection typically covers up to 75% of your salary earnings (or, if you’re self-employed, generally up to 75% of the business profits you’ve generated) until you can work again. Policies typically don’t only offer cover for a specified list of conditions, as trauma insurance might. This means the cover is broader and can protect you against a wide range of health problems – from back injuries and serious illnesses to stress and other psychological issues.

If you make a successful claim, the income stream from your policy kicks in after an agreed waiting period. Typically, this is 30 to 90 days after the event. You may choose a longer waiting period – for instance, if you know that your first few months will be covered by annual leave and sick leave entitlements. A longer waiting period generally means you pay lower premiums. Shorter waiting periods are possible, but may attract higher premiums.

Similarly, the income stream lasts for an agreed maximum period – perhaps 12 months, two years, or until you turn 65. Shorter periods will generally attract lower premiums. This is one of the reasons why income protection policies are so useful, because they can be customised to your specific needs. Additionally, your income protection premiums are usually tax deductible, unless you’ve taken out cover through your super fund (in which case they are generally tax-deductible to your fund). However, if you make a claim, your benefit payments will generally be taxed at your marginal tax rate.

So is income protection insurance right for you? That question is often answered by asking another one – how would your life be affected if you had no income? Imagine the result, six months from now, if today your income suddenly and unexpectedly dried up. Then imagine the difference if instead, after one month, an insurance provider started regularly paying 75% of your income into your bank account.

i http://www.lifewise.org.au/facts-research

Recent Articles

Covid-19 Update: Changes to Roberts & Morrow Office Entry

14th October 2021

14 October 2021 Relevant for NSW ONLY - The requirements set out in this communication are subject to change. With the... Read More

Medium and emerging private groups ATO program

08th October 2021

1 October 2021 The ATO continues to run the medium and emerging private groups program under the umbrella of the... Read More

Self education expense threshold to be removed

08th October 2021

29 September 2021 The $250 non-deductible threshold for self-education expenses could soon be a thing of the past. The government... Read More

NSW JobSaver to end 30 November – IS YOUR BUSINESS READY?

08th October 2021

8 October 2021 When NSW reaches the 80% double vaccination rate, which is likely to be in October 2021, the... Read More