If you’re employed or self-employed, you should consider Income Protection insurance.

Case study

Leanne works full-time and earns a salary of $90,000 pa. She owns a home worth $500,000 and has a mortgage of $350,000. If she’s unable to work due to illness or injury, she wants to be able to meet her living expenses and mortgage repayments without having to eat into her limited savings. After assessing her goals and financial situation, her financial adviser recommends she take out Income Protection insurance to cover 75% of her monthly income.

Shortly after taking out the insurance, Leanne is involved in a bad car accident and is unable to work for six months. Because Leanne had Income Protection insurance, she receives the full benefit of $5,625 per month for five months after her initial one month waiting period (where she’s covered by sick leave from her employer). As a result, Leanne receives a total income of $35,625 during the six months she’s off work – consisting of a combination of sick leave and Income Protection benefits. If Leanne had not taken out Income Protection insurance, she would only have received a sick leave payment of $7,500 and would have struggled to meet her living expenses, mortgage repayments and out-of-pocket medical costs.

Note: This case study highlights the importance of speaking to a financial adviser about protecting your income in the event of illness or injury. A financial adviser can also address a range of potential issues and identify other suitable protection strategies.

Tips and traps

• When choosing a waiting period for your Income Protection insurance, it’s important to take into account any sick leave and related benefits provided by your employer.

• Income Protection insurance premiums will generally be lower if you choose a longer waiting period and a shorter benefit payment period.

• It may be more cost-effective over the longer term if you pay level premiums, rather than stepped premiums that increase each year with age.

• If you take out Income Protection insurance in a super fund, you could arrange to have the premiums deducted from your investment balance without making additional contributions to cover the cost. This could help you afford insurance if you don’t have sufficient cash flow to pay for it outside super.

• If you are the primary income earner, you should also consider insurances that can provide a payment to clear your debts in a range of circumstances and enable your family to meet their ongoing living expenses if you pass away.

• If your partner is not working, you should consider insurances that can provide a payment to cover medical, childcare and housekeeping expenses, if they become critically ill or die.

• Income Protection benefits are assessable income and taxed at your marginal tax rate (similar to salary).