26 Nov Who Will Pay the Bills if you Can’t Work?
And no, the answer isn’t mum and dad. Or at least it shouldn’t be. It’s time to take responsibility for your actions. I’m guessing you have car insurance? It’s likely you’ve got private health insurance? You may have home and contents insurance. But have you ever considered how you would pay the bills, rent, mortgage, food and all the other every day expenses if you couldn’t work because you got injured or sick?
The reality is that one in five Australian families will be impacted by the death of a parent, a serious accident or an illness that renders a parent unable to work. This is a sobering statistics given that only 31 per cent of Australians have income protection insurance.
Who needs Income Protection?
Anyone who relies on their wage income, regardless of age, occupation, whether they are an employee or self-employed. If you ain’t got no mun, you ain’t gonna have no fun.
Seriously, the only question you need to ask yourself to determine if you need to take active steps to protect your ability to earn income is: if I had been diagnosed with cancer yesterday and needed 12 months off work to recover, how would I support myself? If you can’t answer that with anything better than “I’ll sell some assets, I’ll borrow from relatives, I’ll go on government benefits or I’ll dip into savings” you need to have income protection.
An Income Protection policy often means the difference between maintaining your current lifestyle or defaulting on your mortgage and have to completely change your lifestyle and go on government benefits. That’s absolutely not an exaggeration, I’ve been advising on insurance for many years and I’ve seen the best and worst outcomes from clients who did, and didn’t, take up Income Protection.
Most Income Protection policies pay up to 75 per cent of your salary for a negotiated period of time. The options you choose will determine the cost.
You also need to decide whether to have a waiting period and, if so, for how long. For instance, if you are an employee it might make sense to wait 90 days or until you exhaust your sick leave entitlements. This will lower your premiums.
It’s Too Expensive!
One of the reasons people say they don’t have income protection is the perceived cost. But if you were to lose your ability to earn you might regret not having cover, or not having enough cover. Let’s do a worked example:
- Let’s say you are aged 30 and have an annual income of $80,000 before tax.
- Income Protection covers 75% of your gross income, which would result in a monthly benefit of $5,000.
- Now let’s say you have a waiting period of 90 days and a benefit period of “to age 70”. This means you can apply for a claim after waiting 90 days after diagnosis of your sickness or injury, and that the insurer will deposit $5,000 into your bank account for every month you’re unable to work – whether that’s for 6 months, 12 months, 5 years or all the way to age 70! Pretty generous!
The average premium for the above set up, for a white-collar 30 year old male is $65 per month. A bit cheaper than your house or car insurance I’m guessing? But I digress.
OK, so let’s say you’ve been diagnosed with cancer. You’ve been paying your policy diligently for 3 years. So far you’ve spent about $2,500 in premiums (a bit of inflation has been added in). As a result of the cancer you end up having 18 months off work to recover. Income Protection has paid you $5,000 every month for those 18 months, with inflation. You’ve been paid more than $100,000.
Your financial situation and your financial future remains intact, and you’ve recovered quicker than otherwise expected because you had considerably less financial stress. You didn’t have to rely on others, you didn’t have to sell down your assets or dip into savings. And how much did it cost you? The rate of return on insurance as an investment is phenomenal:
- For the $2,500 you paid to get back $100,000 and protect everything you’ve built up over the years cost 0.025 cents for every dollar of insurance. Less than 1 cent per dollar of insurance.
Insane! But of course, it’ll never happen to you.
Lots of Decisions
Once you’ve got your head around the concept of Income Protection and why it’s so important to take responsibility for your financial future you can speak with your adviser about some of the following:
- Whether your Income Protection should be paid via super or in your own name
- Whether stepped or level premiums are right for you
- How long you may require the Income Protection for so appropriate planning is set in place
- Whether the policy should be agreed value or indemnity?
- Whether you need extra benefits on your policy or the standard benefits are best?
Oh, and by all means educate yourself and do your research online but please never buy a policy online…but that’s a whole other post
As always please note the above is general advice only.