What is Income Protection

By MSI Taylor Wealth Management

The idea of insuring against loss of income is one that has clear value, but many neglect to insure their most valuable asset. Income protection could be the answer, so how does it work?  

We happily insure our homes, our vehicles, even our smartphones. But if the main providers of income in households should suddenly find themselves unable to earn due to injury or illness, then the lifestyle effects on a family can be vast.

According to Lifewise, a body co-ordinated by the Financial Services Council, 84% of Australians insure their cars but only 31% insure their ability to earn an income. One obvious solution is income protection insurance. Here we explore how it works.

Income protection typically covers up to 75% of your salary earnings (or, for the self-employed, up to 75% of their share of business profits that they are entitled to) until you are able to re-commence work. This is considered a likely amount that could allow a household to continue payment of essential bills and costs as the insured person recovers.

Policies in the income protection arena typically do not only offer cover for a specified list of conditions, as trauma insurance might. So the cover is broader, from a back injury to serious illness to stress and other psychological issues.

Following an event that renders the insured unable to generate an income, the income stream from their policy kicks in after an agreed period. Typically this is 30 to 90 days after the event. You may choose a longer waiting period, for instance, if you know that your first few months will be covered by annual leave and sick leave entitlements. A longer waiting period generally means lower premiums.

Similarly, the income stream lasts for an agreed maximum period – perhaps 12 months, two years, or until you turn 65. Shorter periods will generally attract lower premiums. So income protection policies can be quite customisable to your specific needs.

Importantly, premiums paid for income protection policies can be tax deductible provided they are not paid by your superannuation fund.

So why would one require income protection insurance? That question is often answered by asking another question – how would your life be affected if you had no income? Imagine the result, six months from now, if today your income suddenly and unexpectedly dried up. Then imagine the difference if instead, after one month, an insurance policy began to pay 75% of your income into your account.

Income protection is increasingly understood to be one of the essential ingredients of a solid wealth creation plan. Speak with your financial adviser if you’d like to know more.