Income insurance can protect your biggest asset, but the best time to consider it is when you need it least.
Your biggest asset is probably not your house, superannuation balance or your car. Multiply your yearly earnings by your years to retirement. For someone aged 25, 40 years earning $50,000 per year is a cool $2 million. Definitely something worth protecting.
When you are healthy you probably think you dont need insurance but this is the best time to get it. Once you are sick you may not be able to get insurance at all or may be forced to pay much higher premiums.
Income Protection Insurance
It is imperative that anyone who relies heavily on their income to meet regular expenses has some form of income protection insurance.
Income protection insurance provides a replacement income if you are unable to work, due to either an injury or illness. It ensures that you are able to continue meeting your regular expenses such as food and mortgage repayments when you are unable to work for extended periods of time.
Premiums of income protection insurance are tax deductible, this means that if you ever make a claim the income that you receive from this policy will taxable.
Always check the small print as there are variations from policy to policy, with the most common benefit periods available being two to five years and payable to age 65.
The amount of cover you can purchase is restricted, normally to 75 per cent of your monthly income earned from personal exertion by way of total remuneration package.
Benefits are paid monthly as income, not as a lump sum.
Income Protection does not specify a list of accepted conditions. Therefore greater coverage is provided than trauma insurance, particularly for temporary illnesses such as back injury and stress-related illnesses.
Factors that will affect the premium that you will pay include:
1. Claim benefit period This is the period over which you will be paid in the event of a claim. This could be two or five years for sickness and accident or until age 65.
2. Waiting Period There are standard waiting periods of usually 14, 30 and 90 days before the benefit will start to be paid under the policy. If you choose to take a longer waiting period, this will usually lower the premium payable.
It is important to consider your financial commitments such as mortgage and other debt payments when you choose this option. If you have accumulated sick leave, annual leave or long service leave, you may not need to claim immediately so can reduce the cost of insurance.
3. Inflation protection You also need to decide whether or not to have any benefits paid in the event of a claim increase in line with inflation. Inflation protection (escalation option) will cost a higher premium.
If you choose to purchase cover to age 65, it is probably worth paying for the escalation option which will increase the monthly benefit paid in the event of a claim in line with inflation. On the other hand if you are purchasing cover of only 2 or 5 years the cost of including the escalation cover may not be worthwhile and you may decide to save the extra money in premium.
4. Taxation Income protection is tax deductible so your tax return reduces the cost to you.
Trauma Insurance
Trauma insurance is another form of protection from not being able to work and is sometimes referred to as critical illness insurance.
It provides a cash lump sum in the event of contracting a specified disease or trauma (you can even still be working). The number of conditions covered (benefits) varies widely, cheaper policies often offering less benefits. In most cases accidental types of traumas are covered immediately, although many insurers impose a waiting period (commonly 90 days after the policy is accepted) for certain illnesses. Trauma insurance is not limited to employed people.
Life Insurance
You can take a policy that pays out if you die, to protect your dependants. A policy can be taken out on a non-working spouse, recognising the costs that would be needed to cover their loss. This form of life insurance is generally the cheapest form of insurance although costs do escalate quickly before age 50.
