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

ARTICLE

14 March 2022

5 mins read

The idea of insuring against loss of income is one that has clear value. But many of us neglect to insure our most valuable asset – our income. 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 one of the breadwinners was suddenly unable to earn an income due to injury or illness?

Australians spend more protecting our cars than our income

Around 58 %1 of Australians aren’t sure what income protection is, or what it covers. Considering it’s what we live on, that’s a concerning statistic.

What’s more of a concern is that we spend more on protecting our cars than our income. According to Canstar, 20212, Australians are paying on average $2000 per annum to insure their cars, compared to Australian average income protection costs3 of $774 for a monthly benefit of $3,125.

How does income protection work and why do you need it?

In a nutshell, income protection insurance will pay you a percentage of your income, for an agreed time, if you have to stop work or you need to work less, due to injury or illness.

How much does it cover?

Income protection policies purchased prior to October 2021 typically cover 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.

Changes came into effect in October 2021 after which new income protection policies purchased cap the maximum income you can receive from all sources at 90% for the first 6 months and then 70% for all subsequent periods.

Older policies may be affected if an increase in cover is required, so it’s worth checking with your financial planner.

What are you covered for?

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.

How and when you’re paid an income

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 off work would be covered by annual leave and sick leave entitlements. A longer waiting period generally means you pay lower premiums, while shorter waiting periods are possible, but may attract higher premiums.

Your income payments will last 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.

You can save on tax with income protection

The good news is that 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).

Keep in mind, 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?

How would your life be affected if you had no income? Imagine the result, six months from now, if your income suddenly and unexpectedly stopped. Then imagine the difference if instead, after one month, your insurance provider began paying 75% of your income into your bank account.

For many Australians, income protection insurance is one of the essential ingredients of a solid financial plan. Talk to your financial planner if you’d like to know more.

Case Study

Wendy is a single mother who works in an office. She relies on her fortnightly paycheque to pay her mortgage, support her young son and invest for the future. After a discussion with her financial planner, she decides to take out an income protection policy offering the highest level of cover available – 75% of her current income until the age of 65.

To help reduce her premium costs, Wendy’s financial planner recommends that she investigate how much leave she’s accrued. This adds up to two weeks of annual leave plus another 10 days of sick leave. Wendy also has an emergency savings fund that could cover her living costs for up to two months.

By stretching her waiting period from 30 days to 90 days, Wendy’s income protection premiums are reduced.

Talking to a financial planner can help you understand your situation and make confident financial decisions (big or small) so you can get the most out of life.

References

^{1 SMH, January 17, 2019, “Australians in the dark about what income protection covers”,

2 https://www.canstar.com.au/car-insurance/what-does-car-insurance-cost/

3 https://www.canstar.com.au/life-insurance/income-protection-insurance/cost-of-income-protection-insurance/ based on accountant average male, female smoker and non smoker}

Disclaimer:
Copyright © 2022 AIA Financial Services Pty Limited (ABN 68 008 540 252, AFSL 231109), trading as AIA Financial Wellbeing. All rights reserved. This information is current at the date of this publication and is subject to change. This provides general information only, without taking into account factors like the objectives, financial situations, needs or personal circumstances of any individual and is not intended to be financial, legal, tax, health, medical, nutritional or other advice. Before acting on the information in this publication, individuals should consider its appropriateness having regard to such factors.