Why protect your income?
If an injury or illness forced you to take time off work, could you still keep up with your bills? Imagine what your life would be like if you hadn’t taken the time to ‘protect your income’ and your family’s financial security, in the event of unexpected sickness or injury.
What does income protection insurance cover you for?
To protect your income, cover is generally available for up to 75% of your monthly income. It provides an affordable level of financial protection in the event of sickness or injury. Most importantly, it provides enough financial support for you to return to work.
Some providers also allow you to receive up to 30% off in your premiums if you’re in good health and meet qualification tests.
Harriett is a self-employed architect and receives an income from her business of $120,000 pa. She owns a home worth $500,000 and has a mortgage of $350,000. If she is unable to work due to illness or injury. She wants to be able to protect your income and meet her living expenses and mortgage repayments. Without having to eat into her limited savings.
After assessing her goals and financial situation, her adviser recommends her to ‘protect your income’ with insurance to cover 75% of her monthly income. A couple of days after taking out the insurance, Harriett is involved in a bad car accident. Consequently, is unable to work for six months.
Because Harriett had Income Protection insurance, she received the full benefit of $7,500 per month for five months. In this case, after her initial one month waiting period. As a result of her decision to protect your income, she received a total income of $37,500 during the six months she spent recovering.
If Harriett had not taken out the insurance to protect your income, she would have received little (if any) income during this period. Harriet would have struggled to meet her living expenses, mortgage repayments and out-of-pocket medical costs.
Note: This case study highlights the importance of speaking to a financial adviser about protecting your income in the event of illness or injury. A financial adviser can also address a range of potential issues and identify other suitable protection strategies.
see Tips and traps below.
Protect Your Income
Tips and traps
- Most policies that protect your income offer a range of waiting periods before you start receiving your insurance benefit. (with options normally between 14 days and two years).
- You can also choose from a range of benefit payment periods. Maximum cover generally available up to age 65.
- As a general rule, the longer the waiting period and the shorter the benefit payment period, the less Income Protection insurance will cost.
- It may be more cost-effective over the longer term if you pay level premiums. Rather than stepped premiums that increase each year with age. (see Wealth Protection Strategy 6).
- If you take out Income Protection insurance in a super fund. You can arrange to have the premiums deducted from your investment balance without making additional contributions to cover the cost. This could help you afford insurance if you don’t have sufficient cashflow to pay for it outside super. (this is not tax deductible)
- If you’re self-employed or in a small partnership, you should also consider using Business Expenses insurance to cover 100% of your eligible business overheads if you are unable to work due to illness or injury (see Wealth Protection Strategy 8).
- You should also make sure you have enough personal insurance to protect yourself and your family if something happens to you. To find out more about using insurance for personal protection purposes, contact us today to speak to one of our income protection specialists
*See our ‘Protecting you and your family’ guide.
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