Income protection insurance – It will be alright – won’t it?
More than 80 per cent of Australians have insurance for their car but fewer than one third of us have income protection insurance* to protect our livelihoods should the worst happen. While the odds of a bingle are higher – once every seven years on average – being waylaid by injury or sickness for a lengthy period is not as unlikely as you may think. In fact, a staggering 60 per cent of Australians will be off work due to serious injury or sickness for more than a month at least once in their working lives, according to a 2012 Rice Warner report on underinsurance.
Sadly, many who find themselves in this position are far from financially prepared. The same report revealed more than 50 per cent of couples don’t have enough life insurance cover for one partner to maintain their standard of living if the other passed away, while nine out of ten families with dependent children would not be able to maintain their usual lifestyle if the main earner died.
While many view insurance as a grudge purchase, the harsh reality is bad things can, and do, happen – often when you least expect it. What you need to consider is how you would pay the mortgage, household bills and life’s other ever-increasing costs if you or your partner passed away or could not work.
It seems many Australians, given our comfortable lot in life, are either too reluctant or too busy to contemplate financial protection or feel our funds are better spent elsewhere. Our inertia has become so apparent that the Australian life insurance industry has set up the Lifewise campaign in a bid to boost coverage. While the move may seem a little self-serving, Australia has one of the lowest levels of life insurance in the developed world, and that’s despite most of us having some life cover in our superannuation.
Unfortunately, underinsurance is as much a burden for society as it is for individuals, with Rice Warner Actuaries estimating that around $250 million is made in welfare payments in Australia each year for deaths of parents with insufficient life insurance.
Having some savings, plus adequate income protection and life insurance should be part of every household’s personal finance plan. It could mean the difference between getting wiped out or getting back on your feet.
Get some professional help to determine which insurance products suit your individual needs. Your broker may be able to point you in the right direction through their networks in the insurance industry, to determine which products suit your requirements. Here’s a snapshot of what you should consider.
Life insurance is a lump sum paid to your estate when you die. The larger the lump sum, the higher your insurance premiums. While superannuation funds have a life component, or death benefit, the default payment – which around 90 per cent of fund members rely on – is usually well below the needs of families with dependent children.
Do your sums and consider how much equity you have in your home and any investment properties, how much you owe on your mortgage and any other debts, and how much money you have tucked away in savings or shares.
You should also consider your partner’s working capacity. If you have insufficient life insurance, chances are they will have to work to help make ends meet.
Many couples make the mistake of just covering the main bread-winner, but stay-at-home partners and parents should have some level of cover too. If they suddenly pass away, the current earner may need to spend more time at home with children and have less capacity to earn.
Total and permanent disability (TPD)
Usually bundled with life insurance, TPD covers the costs of rehabilitation, debt repayments and the future cost of living if you are totally and permanently disabled. Check if your super fund offers cover in addition to a death benefit and consider whether this amount would realistically cover your family’s needs if you were unable to work again.
Income protection, or income continuance insurance, covers up to 75 per cent of your usual income if you can’t work for an extended period due to injury or illness. Some employees count solely on workers compensation insurance to take care of them financially if they are hurt, but not all injuries are work-related and workers compensation won’t cover serious illness or many other mishaps that might take you out of action. Workers compensation insurance may also not be enough to cover your mortgage, which would still need to be paid whether you have the capacity to work or not.
Premiums vary, depending how much cover you need and are generally tax deductible**. As with most insurance products, premiums increase with age because you are more likely to make a claim. Some products, however, offer level premiums where you pay the same throughout the term.
A lot of policy holders reduce their premiums when their kids get older and need less support. You can also save on premiums by taking out a policy with a six-month wait period before you can claim.
Also known as critical illness cover, this provides a lump sum payment if you are diagnosed with a specific serious illness, such as cancer or stroke. There are about 45 diseases that fall into this category for insurance purposes, but insurers may not cover all of them.
Life throws curve balls but some events can be planned for. If, for example, you are expecting a baby or need to have an operation, and you know income will be short for a while, take steps to ensure you can still service your mortgage. Your broker can look into options to postpone payments, revert to interest-only for a period or refinance the loan. You may end up paying more in interest by adding to the length of your loan, but you will at least get some reprieve while funds are tight.
Private health cover
If you are debilitated and unable to work – and the condition isn’t covered by workers compensation – you may end up on a waiting list for surgery, unless you have private health cover. While it’s another cost to carry and one that increases by about six per cent a year, private health insurance can help you access treatment quicker and get you back to work faster.