"My partner and I are currently living from one income with three dependents. I would like to know more about how income protection insurance works and how it would benefit me and my family."
- Question from Brooke in Boonah, QLD
Top answer provided by:
Andrew White
Hi Brooke – a fantastic question and thanks for asking it. In my experience, Income Protection insurance (along with Life, TPD and Trauma) is one of the least understood products that a financial adviser will talk about, so hopefully this answer will help both you and others with the same question!
In very basic terms, Income Protection insurance will cover a portion of your salary (generally up to 70% and potentially superannuation contributions) in the event that you are unable to work due to illness or injury. This is particularly important for any serious or unexpected illness that occurs where standard sick leave from your employment will not be sufficient to cover any recovery.
The reason to take out this kind of insurance is to protect yourself and your loved ones from any negative financial ramifications. Income Protection insurance is particularly important in your earlier years of life (think 30s and 40s) and when there are dependants involved. Once children or other dependants are no longer relying on your income, then the need for income protection starts to reduce.
Brooke – in your particular situation, you have one income and three dependants, if the income producing partner was no longer able to work due to sickness or injury, then there would be enormous strain on the remaining healthy partner to both look after the dependants, the sick partner and produce sufficient income to support the family. This is not a situation that I imagine could continue for any length of time. If, however, the income producing partner had income protection insurance in place, this policy would start to pay up to 70% of the normal salary after the waiting period has passed. This would allow time for recovery whilst the healthy partner can continue to support the family without having to worry further about income.
Like all insurance products, ultimately you don’t want to be in a position where you need to use it – in this case it would mean you are either sick or injured. However, your ability to earn an income is the greatest asset you possess, worth far more than the family home or your superannuation balance. Statistics show that only 33% of working Australian’s have Income Protection insurance. For those that don’t, the fall-back during times of sickness or injury is either family support or government support which is often well below what the income was.
The key features that affect the costs of this insurance are:
-The waiting period. This is the time before the benefit starts to be paid – the longer the wait period, the cheaper the insurance. This benefit can start after a set number of days; generally 14, 30, 60 or 90 days. Policies with 180, 1 year or 2 years are also available. Things to think about when choosing a wait period are; how much sick leave you have with your employer and how long could your family last using your savings.
-How long the benefit will be payable – again the shorter the benefit is payable, the cheaper the insurance. Options include 2 years, 5 years and up to age 65 (most expensive but also most comprehensive).
Of the four types of insurance I mentioned above (Life, TPD, Income Protection and Trauma), Income Protection is the most expensive – the reason for this relates to how long a benefit may be paid out. In some serious cases, a sick or injured person may never return to work and the benefit amount would then be paid out to age 65 (or whatever time limit was selected in the policy).
Brooke, I hope I’ve given you a bit more to think about in terms of taking out Income Protection insurance. If you’d like to speak more, please feel free to contact me, or I can refer you to some great QLD based advisers (I’m Sydney based).
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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