Do you have life insurance but no income protection insurance? You’re crazy!
- 94% of Australians have some level of life cover (mainly through their superannuation).
- The average amount of life cover Australians are insured for is $344,500.
- Only a third of Australia’s working population have income protection insurance.
- The median level of income protection coverage is a mere 36% of income.
Why are these statistics so scary? The average size home loan is $374,050, so if you are a single income household the average working Australian does not have enough life insurance to pay out their mortgage upon death for their dependants.
Worse – if you are injured or ill and cannot work for a prolonged period, most Australians will not be able to replace their income. How much is your earning potential worth? A 30 year old Australian earning an average income will generate a total of $3.86 million in wages over their working career. I bet you have your 2012 model car now worth $15,000 insured. I also bet that whilst you are reading this article that you are very likely to have no income protection insurance.
Here are my four quick tips to check that you are properly protected with income protection insurance:
1. Income insurance is tax deductible:
Yes – paying for an income protection insurance premium our of your own pocket is tax deductible at your marginal tax rate. The excuse of not wanting to pay for insurance premiums out of your own pocket just became lame.
2. You may already have income protection insurance in your superannuation:
Check with your superannuation fund if you have a default income protection policy. Many industry superannuation funds provide some default cover. However, normally this cover has a benefit period of only 2 years. That means if you cannot go to work for two years you have replaced your income. Bad luck if you are unable to go to work after two years. I have experience with one family friend who was unable to go to work for 12 years. Luckily, they had a good income protection policy that covered them for that entire time.
3. Don’t have income protection insurance? Get some now!
We can help with providing appropriate income protection quotes. There are three things you need to decide when getting income protection insurance:
a. What waiting period do you need?
The waiting period is how long you must wait after you become injured or ill and cannot go to work. This varies from 30 days to 2 years.
b. How long do you want the benefit period for?
This is how long the insurance will cover your loss of income for. Generally this can be any from 2 years to age 65 and even now age 70. I generally always recommend most of my clients to obtain a policy that has a benefit period to Age 65.
c. How much of your income do you need to be replaced?
Standard income protection policies will provide 75% replacement of your income. I don’t know too many of my clients who could survive on a 25% pay cut. Generally, I recommend my clients take the option to insure 75% of their income.
4. Does the policy provide ‘claim escalation’?
Many income protection policies will index the amount of cover you have with inflation. However, if you go on claim and start to receive the benefit, the benefit may not index with inflation. In most instances I recommend my clients obtain a policy with a claim escalation feature. That way your benefit if you ever are relying on it will increase with inflation.
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