"Are there any income protection insurance plans that will cover 100% of my income? My current plan would only covers 75% of my income, how can I make up this 25% if I need to claim this income protection?"
- Question from Stanley in Belli Creek, QLD
Top answer provided by:
Luke Shad
Income replacement ratios vary from one insurer to another. Prior to October 2021, income replacement ratios offered were ‘more generous’ than what is currently offered. There was a general standard industry maximum income replacement ratio of 75% of pre-disability income across the majority of providers throughout the life of a claim. This has now changed and income replacement ratios on offer have generally become ‘less generous’. It is now common to see a temporary ‘top up’ period that achieves a 75% income replacement only to revert back to a lower income replacement ratio for the life of a claim.
There are however alternative top up options to get your income replacement ratio as close as possible to 100% (or beyond), or more importantly, to a level that suits you personally. This may not come in the form of a traditional income protection policy so thinking outside the square is important.
Firstly, there are two other types of insurances that can potentially overlap with an income protection claim. These insurances are called Trauma/Critical Illness and/or Total and Permanent Disablement (TPD) insurance. These can be utilised to obtain an income replacement ratio for certain claimable events that is optimal for you personally. An ‘optimal’ insurance structure varies greatly between each individual hence it is crucial that you seek advice around what optimal means for you. This comprehensive process will take into account factors such as but not limited to cost of cover, cover type/level needs and structure of your cover.
Secondly, there is the option of self-insurance to bridge this gap/set up your personal insurance plan that is optimal specifically to you. Seeking advice is crucial as a financial planner can set up a plan that incorporates self-insurance via an investment that is considered liquid not only in the case of a claimable event but in any circumstance. This can act as a dual wealth creation and self-insurance plan simultaneously that either optimises your income replacement ratio for you personally and/or contributes to meeting your financial goals over time. Self-insurance can be implemented in a variety of ways which include but are not limited to traditional superannuation, self-managed superannuation funds and/or investments set up outside of super. Superannuation (including self-managed super) can become liquid/accessible in the case of some claimable events but not all claimable events therefore it is important to align your cover goals (what event/s you would like to be covered for) with your personal insurance plan.
Certain investments outside of super do not have access restrictions and therefore a payout from such an investment could align with a wide range of claimable events. Tax implications of self-insurance payouts/withdrawals must be considered for each individual hence seeking advice from a qualified professional is vital.
To summarise, all of the above-mentioned factors are key considerations in setting up an optimal income replacement ratio (whether 100% or not) as part of a wholistic personal insurance plan that aligns with your personal goals and circumstances. We must think outside the square to set up an arrangement that is tailored to us as individuals and seeking advice from a qualified professional is a great way to obtain this peace of mind that an appropriate contingency plan is in place for you as an individual.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.
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