Guarding your paycheck: Is income protection worth it?
People often ask, "Do I really need life insurance if I don't own a house?" Well, what do you think is your most precious asset?
Now, some people might say their fancy car or their shiny new phone. But the real answer is something a bit more intangible. It's your ability to make money. Yeah, you heard me right. That job that puts food on the table and keeps a roof over our heads.
For a lot of us, our income is our most important asset, not to mention our family's lifeline. Now imagine if you're unable to work for a while because of an injury or illness. You've used up all your sick and annual leave, and you're self-employed. It can be tough to keep yourself financially afloat, right?
Unlike life insurance, which pays out a lump sum upon your death, income protection insurance focuses on your well-being while you're alive and unable to work. Income protection is all about keeping the money flowing regularly while you get back on your feet and back to the daily grind. Let's dive into how this safety net works.
Here's how it rolls:
Income protection insurance can provide you with a portion of your regular income if you are unable to work for an extended period due to injury or illness. There's usually a waiting period before the payouts start flowing. After that, expect those benefits to hit your bank account every month.
Counting the costs
The cost of income protection insurance can vary widely depending on your choices. Different products, cover levels, and durations come with different premiums. But that's not all; your health, lifestyle, and occupation also play a role in determining your eligibility and costs.
Insurers evaluate your personal circumstances, like age, occupation, income, and health history, to set the right price. For instance, if you work in a high-risk job, such as mining, expect higher premiums compared to an office worker. Always check the premiums and the terms of any insurance product before purchase.
5 steps to know if you can afford income protection insurance
When you're thinking about income protection insurance: you've got to balance the peace of mind it gives you with how those premiums fit into your monthly budget.
1. Evaluate your monthly budget: Ensure premiums fit comfortably.
- Take a close look at your monthly income and expenses.
- Calculate how much you can comfortably allocate to insurance premiums without straining your budget.
- Ensure that the cost of income protection insurance aligns with your financial capacity.
2. Assess your emergency funds: Could they cover an income gap?
- Review the size of your emergency fund or savings.
- Consider if these funds could cover your expenses during a period when you're unable to work due to illness or injury.
- Evaluate if your savings provide a safety net in case of income loss.
3. Family support: Consider if someone can assist financially.
- Think about whether a family member or partner could financially support you during a period of income loss.
- Discuss this possibility with your loved ones and assess their ability and willingness to provide assistance.
- Factor in family support as part of your financial plan.
4. Leave options: Explore sick leave or available leave balances.
- Check your employment benefits, including sick leave and other types of leave.
- Determine how many days or weeks of paid leave you have accumulated.
- Calculate how this leave can be utilised to bridge any income gap during a health-related absence from work.
5. Asset check: Determine if you have assets to sell for funds.
- Take inventory of valuable assets you own, such as property, vehicles, or investments.
- Assess if you would be willing to sell these assets in case of a prolonged income loss.
- Calculate the potential funds you could generate from selling assets to support your financial needs.
Some things to keep in mind
- The monthly benefit amount and how long you'll receive it depend on what's decided during the underwriting process.
- The income benefit payments you get will be either the monthly amount you're insured for or 70% of your pre-tax income—whichever one is less. This amount might also be adjusted if you're receiving other disability payments for the same injury or illness.
For full details including what exclusions apply, read the financial Product Disclosure Statement.
Common questions about income protection
Q: Are income protection insurance premiums tax deductible?
A: Yes, the Australian Tax Office (ATO) says you may be able to claim your income protection insurance premiums as an income loss deduction. But remember, when it comes to the tax side of income protection insurance, it's always a good idea to chat with a pro.
Check out the ATO's info on it: ATO Income Protection Insurance
You can't claim a deduction if the policy:
- is through your superannuation fund and the premiums are deducted from your contributions
- pays you a capital sum to compensate you for injury.
Q: Who should consider income protection insurance?
A: Anyone reliant on their income should explore this safety net.
Q: What are the exclusions that apply to income protection insurance?
A: There might be a few exclusions to watch out for. Your income benefit won't kick in if your injury or sickness is due to:
- Deliberate self-inflicted actions
- Suicide attempts
- Normal pregnancy, childbirth, miscarriage, or pregnancy termination
- War (declared or undeclared), war-like activities, or involvement in riots or civil unrest
- Engaging in criminal activities or illegal acts
Other exclusions may apply. Please read the financial Product Disclosure Statement carefully.
Q: Do I need to continue paying premiums while I can't work?
A: During the period when we're providing your income protection insurance income benefit, your policy premiums will be temporarily waived as per your monthly claim payments. This continues until you either return to work or reach the maximum benefit period. Any premiums paid during the waiting period will be refunded.
Q: Can my job impact my income protection insurance premium?
A: Yes, your job can influence the premium you'll be paying. Premiums are calculated based on various factors, including the nature of your job responsibilities, your age, whether you smoke, and other relevant factors.
Q: What happens if I get sick or injured overseas?
A: Provided you are an Australian citizen or permanent resident living in Australia at the time of application, you’re covered anywhere in the world.
Income protection insurance isn't just about the money; it's about peace of mind. With a solid policy, you can focus on work and life, knowing you won't be left high and dry if the unexpected strikes.