Insurance – income & home, what when & why.

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What’s Your Biggest Asset?

I’ll venture a guess… You would never dream of driving without insurance, right?  And your home and its contents are covered?

I thought so.

Yet, every day as a financial planner, I encounter people who insure their homes and cars but fail to realise their biggest asset is actually their ability to generate an income.

It’s not entirely surprising because insurance has always been something people either loath or are indifferent to. It’s not as glamorous as buying that shiny red Porsche or a new Louis Vuitton handbag (not many things are!), but it’s a lifesaver if you find yourself in the unfortunate position of having these itemsstolen or damaged.

Likewise, when it comes to your income, imagine if that got “stolen” as a result of illness or injury. It’s not nice to think about, but having your income unexpectedly stop is going to cause a whirlwind of issues for you and your family.  Though the loss of a flashy car or a handbag is a disappointment, the loss of uninsured income can really be disastrous.

Once your sick leave and other leave entitlements run out, do you have enough in your savings to get by whilst recovering? How long could you continue paying your household bills? Would you be able to continue making mortgage repayments? How would you manage day-to-day household expenses like buying groceries?

Ways of Managing an Unexpected Loss of Income

There are number of options available to deal with the loss of income when sickness or injury occurs – good and bad, sensible and not so sensible. You could:

  • Ignore theissue altogether. The phrase “it’s not going to happen to me” is fraught with danger. Life is inherently filled with uncertainty and no one plans to have a major accident or discover they’ve been diagnosed with a serious illness (physical or mental). The fact of the matter is that of the working population, 1 in 6 men and 1 in 4 women are expected to suffer a disability from the age of 35 to 65 that causes a loss of six months or more from work.[i]
  • Rely on Centrelink or WorkCover. Would you be able to survive on a Centrelink payment of about $450pf to cover your household bills and medical expenses? Or what happens if you get injured outside the workplace? Workers Compensation only kicks in if the injury is incurred at work.
  • Self-insure. You could set up a cash reserve to cater for a serious event. Unless, you’re rolling in money, most of us just don’t have this option and it becomes a little impractical.
  • Rely on friends or families members. For most people, this option is not ideal either. Not only would it place significant financial strain on ourloved ones, it would leave most of usacutely feeling the loss of our independence and sense of self-determination.

 

Alternatively… you could:

  • Take out income protection (or salary continuance). For the majority of people, this is the easiest, most reliable and most affordable option.

Income Protection Insurance

Income protection insurance does pretty much what it says it does; it ‘protects your income’. You pay your premiums and in the event you can’t work due to sickness or injury, your insurer will pay up to 75% of your regular salary.

You might also have heard the term ‘Salary Continuance’ banded about. This is essentially the same thing as income protection (it allows you to ‘continue with part of your salary’) except the policy will be held in your superannuation fund.

Things to Think about When Selecting Income Protection:

  • How long do you want to wait before you receive payment?

Typically you can get waiting periods of anywhere between 14 days to 2 years. When deciding on a waiting period, consider how much of your paid leave entitlements and cash reserves you can afford to use up.

  • How long will you need the payments to continue?

Payment periods will vary by the policy you select.  Some policies will cover you for 2 years.  Others will cover you until you reach the age of 65 or even 70.

  • Should it be held in super or personally?

The benefit of holding a policy personally is that the premiums are 100% tax deductible.  If you choose to hold your policy in your super fund, you can use the money you won’t be able to access until retirement (i.e. your superannuation) to pay your insurance premiums and protect your income while you work.

  • How much will it cost?

This depends on a number of factors, including but not limited to your age, gender, health, occupation, whether you smoke, how much income you want covered, how long you’re willing to wait before payment and how long the payment will continue.

As a general rule, income protection can cost around one week’s salary per year (approximately 2% of your annual salary).

  • What’s the Value of Peace of Mind and Stability?

Having income protection in place is all about planning for the unplanned and ensuring your finances will be in order no matter what lies ahead. And, getting your income protected might just be the most important gift you ever give your loved ones. In the event that you become sick or injured,it will ensure your family’s continued stability and uphold their standard of living.

This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a financial adviser, whether the information is appropriate in light of your particular needs and circumstances.

What to do Now?

If you’re wondering about Income Protection, it’s important to ensure the policy you select will reflect your specific needs and your individual financial situation.

We’d always recommend that you seek the help of a trusted financial adviser as you determine which policy is right for you.  Not only will they help you wade through the myriad options, they can provide invaluable insight, industry tips and access to an extended network of professionals.

For more information:

Visit the Kearney Group online(www.kearneygroup.com.au) or give our team a ring on +61 3 9428 8822.

Expert Profile

Nga Vu | Senior Financial Planner
B Business – Financial Planning (RMIT), CFP

Nga Vu is a Senior Financial Planner with Kearney Group.  She is a Certified Financial Planner®, with a Bachelor of Business degree from RMIT and experience in the financial services industry since 2003.

Nga is a dedicated team player, with a passion for relationship-driven advice.  She enjoys basketball, cooking and reading, and has volunteered with The Big Issue Australia.

Connect with Nga on LinkedIn: http://au.linkedin.com/pub/nga-vu/52/2a4/a30

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