By Balki Balakrishnan*
Melbourne: A typical family should have these five types of insurance covers – Life & Terminal Illness (TI), Total & Permanent Disability (TPD), Trauma (Critical Illness), Income Protection and Child Trauma covers. In the last edition of this newspaper, we explored the features of Trauma Insurance.
This article looks at Income Protection cover to help you understand what you should be mindful of in regards to this cover.
Income protection insurance provides a monthly benefit to help you stay on top of your debts, pay for medical bills and generally give you the means to maintain a reasonable standard of living if you are not able to earn due to an injury or illness. In the event of a claim, the insurer will pay an amount (normally up to 75 per cent of your gross salary in Australia) until you have returned to work again, or up until the maximum benefit period as stated in the policy which is normally two year, five year or up to age 65.
Most people wouldn’t drive without car insurance, or go without home & contents insurance. Why would you not protect your greatest asset which is the ability to earn an income? Your and your family’s lifestyle depends on it and more importantly, loss of this income will make living comfortably during retirement in jeopardy.
So, what are the chances of claiming on Income Protection insurance? In 2005/06 alone there were approximately 690,000 serious injuries in Australia. Of these, 45% were not able to receive financial assistance through workers’ compensation (Source: Australian Bureau of Statistics – Australian Social Trends 2007) leaving them to fend for themselves financially.
We hear about people suffering from lifestyle related diseases and insurance statistics confirm that more and more of us are exposed to trauma illnesses. Cardiovascular disease was the main cause of 480,548 hospitalizations in 2013/14, which is one Australian every minute. (Source: https://www.heartfoundation.org.au/about-us/what-we-do/heart-disease-in-australia).
Assuming you were unable to work because of an illness or injury, how long do you think you can survive on zero income before you need to sell your assets? The fact is a significant portion of working Australians could only survive less than one month without their income before needing to sell their assets (Source: Zurich Misinsurance Whitepaper February 2014). We really don’t want us and our family to be in this situation.
Income Protection cover can be organized within your super environment similar to Life & Total & Permanent Disability (TPD) covers. However, you should be mindful of the conditions under which you will be paid on a claim. You can organize your cover outside super environment but linked to your Life policy in the super environment to reduce the premium. One of the good outcomes of organizing the cover outside your super environment is that it is tax deductible at your marginal tax rate. You may also have a better claim experience because they are fully underwritten.
Depending on the insurer, you may be offered various types of covers with different features and premium structure. Most of the insurers will offer you a guaranteed/agreed outcome on a claim or an indemnity type of benefit where the amount paid is determined based on your income at the time of claim. You should also be cognizant of the tiers of definition the insurer’s offer and the difference between them before choosing an insurer. Another critical element to consider is the benefit period. The benefit period is the maximum period you are paid on a claim. It can range from 2 years to age 65. You also should be mindful of the waiting period feature on this type of cover. The waiting period typically ranges from 14 days to 2 years. The waiting period depends on your circumstances and therefore there is no one solution for all.
How much you should be insured for, what financial outcome you can expect if you were to make a claim, how long you need to be insured for, whom to insure with, and the features of cover you would need can be a daunting matter. Income Protection cover needs to be considered along with other types of insurance covers as well so that you and your family are protected in the best way possible. The Financial Advisor who will educate you, discuss with you and ultimately implement a solution that is appropriate to your circumstances, needs and your budget. It is important that you get this cover correct the first time to avoid unpleasant surprises at the time of claim.
Opes Financial Solutions Pty Ltd trading as Opes Financial Planning ACN 618 122 795 is an Authorised Representative of Merit Wealth Pty Ltd AFSL 409361.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. Please contact us at 0419 506 560 if you want more information or need to review your insurance covers.
*Director | Financial Advisor
Authorized Representative Number: 409415
Merit Wealth Pty Ltd. AFSL No: 409361
M: 0419 506 560