You've worked hard for what you have,
so why risk losing it in the event of illness or injury?
If you were unable to earn a living due to illness or injury for a few days or a few weeks, you may have sufficient sick leave at work to cover yourself.
If it was a little longer, you may have sufficient savings to get you through. But what if it was a few months or a year? What if it was many years or a decade or more?
If you are lucky, you may have disposable assets to sell, but that could leave a huge dent in reaching your financial goals. You may be able to live off credit cards for a few months, but that is not a sustainable strategy.
For the average Australian, being unable to earn an income for a sustained period of time will quickly result in financial pain, and in the worst case, possible bankruptcy.
Income Protection insurance is a cost effective - and tax deductible - way of protecting yourself. Income Protection will pay up to 75% of your pre-claim income for a period of time determined by the type of policy you have.
In the unfortunate event of injury or illness affecting your ability to work, instead of worrying how you will meet the next mortgage repayment, you can rely on your income protection policy and concentrate on your recovery whilst knowing that your financial goals and aspirations are still on track.
Options available with income protection
There are a number of variables you can choose from when establishing an income protection policy, and many of these will affect the premium you pay.
The first option to consider is the waiting period, this is the period of time you must wait before the insurer will start your payments. For many people, a waiting period of 14 or 30 days is appropriate, as they will not have sufficient sick leave entitlements or savings to sustain them for a longer period. For others who have substantial sick leave or savings, or simply wish to reduce their premiums due to affordability, a waiting period of 90 days or more may be suitable, as it will reduce the premium payable for your cover.
The next option is the benefit period, which determines how long you will be protected for. The maximum benefit period is to age 65, which means if you are no longer able to work at all, your income will be protected up until age 65. Shorter benefit periods of 2 and 5 years are also available, which may assist with affordability if budget is a concern.
Other options for income protection include the benefit type. There are two benefit types available, agreed cover (also known as guaranteed) and indemnity cover. With an agreed policy, you must provide evidence of your income at the time of applying for cover, and you will then be guaranteed to receive that amount in the event of a claim, even if your actual income has declined since the insurance was taken out. The second option is indemnity, which is a cheaper form of cover that will only pay up to 75% of your income immediately prior to the claim being made, even if the amount of cover on your policy is higher.
The decision to take an agreed policy or an indemnity policy is especially important for the self-employed and other people whose income may fluctuate. If a claim is made at a low point in your income cycle, the claim paid by the insurer will be based on this lower amount. With agreed cover however, you will be assured of receiving the full amount originally agreed to by you and your insurer at the time of taking out the policy.
Juggling options such as the waiting period, benefit period and benefit type can be difficult, especially when combined with trying to select the right amount of cover with the company that best suits you. A qualified financial planner has the experience and knowledge to tailor a protection package that best suits your needs and objectives, as well as your budget.