Your Most Valuable Asset and How to Protect It
If you were asked to list your most valuable assets, your home, vehicle and investment portfolio would probably top the list. But it’s easy to overlook the thing that allowed you to accrue all these in the first place: your ability to earn an income.
For most people, the ability to work and generate an income is necessary to achieve many of life’s goals, whether it’s travel, buying a home, or planning for retirement. This goes doubly so if you’re in your 40s or 50s, which are typically the years people have the highest level of financial commitments. But what would happen if this ability was stripped from you, even temporarily?
Protecting your income against unexpected shocks
Like many other assets you own, your income earning ability can be insured with income protection insurance. That means if you suffer an illness or injury and can’t work, you can still receive a portion of your income to cover day-to-day expenses while you recover.
With income protection insurance, insurance providers will generally allow you to insure up to 75% of your before tax income, but you don’t have to opt for the maximum cover available. If you believe you can get by on just half your current income, you can save money on your overall insurance costs by selecting a lower cover option. How long the benefit will last is also up to you — on the shorter end, you can insure your income for two or five years, but policies spanning until age 65 are also available.
Understand when the policy will begin
Many income protection policies will also let you choose a waiting period, which is the number of days you are considered unable to work as a result of your illness or injury until your benefit period starts. You’ll typically be able to choose between a 30, 60 and 90 day or 2 year waiting period, with higher premiums payable on shorter options.
If you expect to have enough savings (along with sick and annual leave) to last a few months, you could lower your premium by opting for a longer waiting period. But you should also consider the possibility that you’ll be back on your feet before this period is over, which would mean not receiving any benefits.
Holding income protection insurance through super
The good news is you might already have income protection insurance through your super. This is often cheaper than retail insurance, partly because super funds buy their policies in bulk.¹ And while the default cover will most likely be lower and not tailored to your circumstances, you may be able to contact your super fund and arrange to have it increased.
For example, if you’re defaulted to a basic policy with a benefit period of two years, you may be able to apply for one that lasts five years or until you turn 65. You’ll often have to provide some details about your medical history as part of the application, and in some cases, you might be denied cover or only offered partial cover.
While convenient, there are some things you’ll need to be aware of if you’re relying on income protection.
Is income protection insurance tax deductible?
You can usually claim a tax deduction for Income protection premiums if you hold the policy personally (your super fund claims the tax deduction if it's in super). Often, however, personally owned policies can be bundled with other forms of insurance, such as Total Permanent Disability (TPD) and critical illness cover, which means you’ll only be able to claim a specific portion of the overall premium. Consider speaking to a financial adviser before reporting your premiums to understand the deductions you might be able to make.
As for any payments you receive via income protection insurance if you wind up making a claim, these will count as income and must be included in your tax return.
Other things to keep in mind:
Your benefit is generally based on your income at the time of claim. Insurers previously offered ‘agreed value’ cover, which was based on a set figure, but as of 31 March 2020 this can no longer be provided (although grandfathering arrangements apply for insurance policies that commenced prior to that).
Many policies will come with what’s known as an ‘offset clause.’ This allows an insurance provider to reduce the benefit payable if you receive other forms of income over the same period (with some insurers also offsetting any benefits or income you might receive in the future if they relate to the same condition).
When applying or seeking to amend your cover, if you have a pre-existing medical condition, you might be deemed a higher risk and your insurer could increase your premiums, if not exclude the condition from your cover or reject your application altogether. Generally, insurance policies will come with various limitations and exclusions, so make sure to read the insurer’s PDS carefully and ask if you’re unsure about anything.
¹https://moneysmart.gov.au/how-life-insurance-works/insurance-through-super
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