Income protection insurance to age 65: Why short-term solutions aren't enough
Does life insurance feel like you're submerged in a sea of options? Well, we're here to throw you a life jacket and make it all easier. We're putting the spotlight on income protection insurance—more specifically, a benefit period up to age 65—as opposed to the 2 or 5-year benefit period your super fund might be offering. We'll explain why we believe a benefit period to age 65 is the bee's knees when it comes to protecting what matters most to you.
Don't sell a kidney, here's what you need to know about income protection
Put simply, income protection insurance is designed to provide you with a regular income if you can't work due to illness or injury. It's there to give you a regular income so you can still pay your bills if the worst happens. But here's the kicker—what if you're out of work for more than a couple of years? That's where the longer benefit period until age 65 comes in to save the day.
So, here's something to think about. Imagine you've got a fancy $5 million Ferrari. You wouldn't skimp on getting insurance for the full amount, would ya? So, why on earth wouldn't you insure your income, which could be even MORE valuable? Let's say you're a 30-year-old earning a sweet $100,000 a year. If you were unable to ever work again, you’d be losing out on approximately $5.87 million dollars in earnings over your working life.
For many people, cover to age 65 might seem like overkill. We get it, it can be hard to imagine being unable to work long term, and it's one of those things that seem to only happen to other people. The reality is, it happens to people just like us every day, often unexpectedly. We would always recommend, where possible, leaning on the conservative side and making sure that you’re securing that valuable future income for the long haul.
Because not all types of insurance are created equal
One common misconception about income protection insurance is that it's the same as total and permanent disablement (TPD) insurance. But that's not necessarily the case.
Here's the deal: TPD insurance pays out a lump sum if you can't work ever again, while income protection insurance covers you monthly if you can't work in your usual job for a period of time.
If you're on an income protection claim for 5 years, that doesn't necessarily mean that you are totally and permanently disabled, unable to ever work again. Doctors may have reason to believe that you’ll get better some day! In another scenario, you may have suffered an illness or injury in which you can only work reduced hours due to pain, for example. In that case, you technically can still work. Therefore, in both cases, you would not be eligible for a TPD claim, leaving you without an income once your income protection policy stops paying out at the 5-year mark.
And look, according to TAL's (one of Australia’s biggest retail insurers) Income Protection Claims duration insights, while 92% of income protection insurance claims are completed within two years, 8% continue for more than two years and account for a whopping 80% of all claim costs, which means a huge percentage of all payments goes to the 8% of claimants who need ongoing support beyond 2-year timeframe.
In fact, Finder research has found that only 35% of Australians would be able to meet their bills for more than 3 months if they lost their job tomorrow.
That's why it's so important to have a long-term benefit period for your income protection insurance. You never know how long it might take to recover from an injury or illness, and you don't want to be stuck without an income after just a few years. So, make sure you choose the right policy with a benefit period that makes sense for you and your family.
Hold the phone: Do you really need income protection insurance?
Deciding if you need income protection insurance? Here are a few situations it can be important:
You're self-employed or own a small business. Because we all know "sick leave" doesn't really exist when you're the boss.
You're employed, but your sick leave might not be enough to cover extended time off work due to injury or illness. Not many people have the luxury of sick leave that lasts longer than a few weeks, let alone all the way through to retirement age.
You've got people (or pets) who rely on you for income. You're their bread and butter, baby.
You've got debt (don't we all?). Whether it's a mortgage, a car loan, and a bunch of credit card debt, the bills gotta get paid even if you're not bringing home the bacon.
Basically, if you have an income that you or others rely on then, yes you need income protection.
Let's get our facts checked
Zurich’s white paper for the cost of care looks at the lifetime costs associated with various medical conditions and injuries. The whitepaper notes that a "typical recovery time for cancer, heart attack, and stroke is often between two and five years, but may take much longer depending on the severity of the condition." This doesn’t even cover things like chronic illnesses, or major injuries that could leave you out of work indefinitely. Therefore, a benefit period of only 2 or 5 years may not be sufficient to cover the full costs of recovery and rehabilitation.
And hey the same article shows that one in every three Australian men and one in every four Australian women will be diagnosed with cancer by the age of 75 years. That's another reason as to why we believe a benefit period to age 65 is the best option for our clients. It provides long-term protection for your income, so you can focus on recovering from an illness or injury without worrying about your finances.
Although healthcare in Australia is largely publicly funded, did you know that there are still ridiculous out-of-pocket (OOP) costs associated with cancer diagnosis, treatment, and survival?
For example, if you're a man with prostate cancer, you can expect to fork out an average of $36,800 over your lifetime. And if you have lung cancer, that figure jumps up to a whopping $74,600.
So although it's great that we have access to healthcare, it's also important to remember that it can come with a hefty price tag. And when you're already dealing with a serious illness or injury, the last thing you need is added financial stress.
The rollercoaster of Tracy's breast cancer battle
When Tracy, a working mum of three, was diagnosed with breast cancer, it turned her life and the lives of her husband and children upside down. It wasn't just the fear of losing a loved one that shook her and her family to the core—they also had to battle financial difficulties.
Tracy's path to healing included countless tests and specialist visits, alongside an intense and time-consuming course of chemotherapy and radiation treatment. Unfortunately, these procedures came at quite a cost to Tracy and her family.
Her first step towards diagnosis involved a mammogram and MRI scans, which added up to approximately $650. Every visit to her surgeon came with another $200 fee. Then came the hefty $2,000 bill for her radiation treatment. And the out-of-pocket costs didn't end there. The side effects of her chemotherapy meant shelling out approximately $400 for headwear to cope with hair loss. All in all, Tracy's first year following diagnosis came with almost $7,000 in medical expenses.
The treatment schedule was so intense that Tracy had to stop working for almost six months, resulting in a loss of income of almost $35,000—a significant blow to the household since Tracy is the primary earner.
And the uncertainty doesn't end there. With more tests and potential treatments looming in her future, Tracy and her husband are constantly worried about how they will continue to keep Tracy's health a top priority and support their family. It's a daily rollercoaster ride for Tracy and her loved ones.
Source: Zurich Insurance Group. Cost of care whitepaper.
Put a lid on unexpected bills
We've given you the lowdown on why we recommend a benefit period up to age 65 for your income protection insurance. It's not because we're just a bunch of boring, conservative financial advisers, but because we truly believe in securing your income for the long haul.
After all, life is full of surprises, and not all of them are good. You might be cruising through life, sipping your latte, and then bam! You're hit with a serious illness or injury that knocks you off your feet. And the last thing you want to worry about when you're dealing with that blow is how you're going to pay your bills.
So, do yourself a favour and chat to your adviser so you can focus on living your life and leave the financial worries to us. And who knows, with all that extra peace of mind, you might even be able to afford a few more lattes.
Sources: