How to safeguard your salary with income protection insurance

Your biggest asset is probably not your home, or superannuation balance. If you multiply your yearly salary by your years to retirement, you may be surprised by the large figure. For someone aged 25, 40 years earning $50,000 per year is a cool $2 million. Now that is definitely something worth protecting!

When you are healthy you probably think you don’t need insurance – but this is the best time to get it. Once you are sick you may not be able to get insurance at all or may be forced to pay much higher premiums.

What is Income Protection Insurance?
If you rely heavily on your income to meet regular expenses then you should have some form of income protection insurance.

Income protection insurance pays a monthly benefit, which can replace up to 75% of your income if you are unable to work due to injury or illness. It ensures that continue to meet your regular living expenses when you cannot work for extended periods of time.

Make sure you check the fine print outlined in the life insurance company’s product disclosure statement (PDS) as the details will vary from policy to policy. The most common benefit periods available in Australia are usually two to five years and payable to age 65.

Unlike trauma insurance, income protection insurance does not specify a list of medical conditions. This means you can often get better coverage, especially for medical conditions like back injuries and chronic fatigue.

Factors that may affect the level of income protection premiums you pay include:

1. Waiting Period
This is the period of time you need to wait before the benefit will start to be paid under the policy. There are standard waiting periods of usually 14, 30 and 90 days.

2. Claim benefit period
This is the length of time you will be paid in the event of a claim. This could be two or five years, or until age 65.

Generally speaking, if you choose a longer waiting period or benefit period, your premiums will usually be lower.

It is important to consider your financial commitments such as rent or mortgage and other debt payments when you choose these options. If you have accumulated sick leave, annual leave or long service leave, you may not need to claim immediately so you reduce the cost of your income protection insurance policy.

3. Taxation
Income protection is generally tax deductible, but always speak with your accountant or tax agent in relation to any tax advice.