Do you need income protection insurance?
Although most Australians have a strong understanding of the need to protect major assets, such as their home and car, with the appropriate insurance, most don’t consider extending this to their most important asset: their income.
The roof over your head and the car you drive are important. However, for many of us the ability to earn an income is the one asset we could never afford to be without. Consider the case of a 32-year-old earning $70,000 a year. If they were involved in an accident that caused them to lose the ability to work for six months, they would forfeit tens of thousands of dollars in potential earnings – a figure that doesn’t address pay increases related to inflation or promotion.
Despite the strong case for income protection insurance, Australians have been slow to take it up when compared to their global counterparts.
The value of income protection
Every day, Australian workers surrender their ability to earn an income due to factors such as serious illness and accidents. However, it’s not just extreme cases that can compromise your earning capacity. It’s surprising how a few months of not working can take a significant toll on your family’s financial health, security and wellbeing.
Income protection insurance affords you a powerful safety net if you have an accident or illness and can no longer undertake work. The funds from an income protection policy can be used to cover your mortgage and rent costs, as well as essentials such as feeding your family and any unprecedented additional expenses that may arise.
Most policies are highly flexible, easy to receive a quote and will cover up to 75 per cent of your salary for a period of time (such as ANZ income protection insurance), while others will account for up to 85 per cent, with the remaining 10 per cent contributed to your super. Commonly known as the ‘waiting period’, this is a time before the first payment is made, and usually takes 30, 60 or even 90 days depending on your policy selection.
Factors taken into account and tax deductibility
Income protection premiums can vary between providers and are subject to factors such age, gender, occupation and lifestyle choices, such as smoking. They also fluctuate depending on your waiting period, your agreed or indemnity style policy and minimum working requirements.
However, insurance protection policies are generally fully tax deductible, except when granted in the form of a benefit – the portion of the premium contributed towards a lump-sum cover for death, injury or disablement is not an allowable deduction. For more information on income protection and tax deductibility, visit the Australian Taxation Office.
Sick leave, disability and worker’s compensation
Many Australians view sick leave and disability pensions as adequate cover if they lose their income, but the grim truth is that these are unlikely to be adequate. Sick leave is only designed to address short absences from work and disability pensions are often too insignificant to meet the living standards of most Australians. Although worker’s compensation is another potential option, this only applies to injuries you incur in the workplace.
Income protection insurance is an effective way to ward off the financial fallout from loss of income. Enlisting the right policy will ensure that factors that affect your income will not alter your family’s comfort or your way of life.