Income protection insurance: Is it still worth the premiums?
Income protection insurance is a financial tool that’s essential for some people, ‘nice to have’ for others, and possibly quite unnecessary for a third group. In other words, there’s no one-size-fits-all answer to whether the premium cost justifies the risk. It depends on your circumstances, so it’s worth examining what the cover provides and the factors that should influence your decision-making.
What is income protection insurance?
Income protection insurance is meant to replace your income, based on your annual earnings in the year before a serious illness or injury that prevents you from working. It can pay up to 90% of your pre-tax income for the first six months of your disability and up to 70% for a further period.
Note that you will only be covered if you lose your income for medical reasons, not for redundancy or other employment termination, or for taking unpaid leave. Policy terms will vary, so it’s important to read the Product Disclosure Statement.
Cost of income protection premiums
Premiums will vary based on your age, gender, occupation, health, lifestyle, benefit payment period, how long you choose to wait before payments start, and whether you decide on variable or age-stepped premiums. This means the cost can range from as little as $35 per month to over $100 per month. You would need to compare quotes covering your own situation from several insurers.
Reasons for choosing income protection insurance
- Safety net
Having a security buffer when your income stops, so that you can still pay bills and make mortgage repayments, is especially important if you don’t have a large amount in emergency savings.
- Self-employed
Small business owners and other self-employed people may not be able to rely on sick or annual leave if they are unable to work.
- Primary breadwinner with dependants
If you’re the main or only income earner with a family that relies on your earnings, losing your income for an extended period could be devastating.
- Risky occupation
Although you’ll pay more in premiums, being covered for an occupation with an above- average risk of illness or injury is reassuring.
- Peace of mind
Financial stress can hinder your recovery from illness or injury. Protecting your income will reduce the additional anxiety.
- Personalised policies
You don’t have to pay for other policyholders’ potential problems. Premium costs will depend on your own situation and choices.
- Tax deductible
Income protection premium costs, for policies held outside your superannuation account, are effectively reduced by the fact that they can usually be claimed as a tax deduction.
Reasons for deciding against income protection insurance
- Age and health status
Young, healthy individuals with no dependants may feel less likely to need this type of insurance.
- Waiting periods
Some policies have long, fixed waiting periods before you can claim, by which time you may be back at work.
- Exclusions and complexity
Conditions, definitions and exclusions regarding certain occupations and types of disability may make it difficult for you to claim.
- Insurance through superannuation
Total and Permanent Disability (TPD) cover may be automatically provided via your superannuation, and you may also have the option to have Salary Continuance Insurance premiums deducted from super contributions made by your employer. However, this type of insurance is less flexible and is not tax-deductible.
- Large emergency savings fund
If you have deep savings and/or minimal financial obligations, you may regard income protection insurance as unnecessary.
- Low risk occupation
Anyone pursuing a desk-bound, low stress occupation as an employee is less likely to make a claim.
Get some help before you decide
With so many pros and cons, not only is it clear that income protection insurance is extremely worthwhile for some but questionable for others, it’s also plain that deciding whether it’s right for you can be complicated. However, your financial adviser can help you create a budget to clarify your financial situation should your income be interrupted, and can also advise on policy types, conditions and premiums.
For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.
