Income Protection Insurance – Protecting your most important asset

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It is estimated that the average Australian professional salary earner’s accumulated post-tax earnings between ages 25 and 60, expressed in today’s dollars, is somewhere between $3 million and $4 million. Compared to average capital city house values of between $450,000 and $900,000 (depending on location), or average new car value of around $40,000, an individual’s wage-earning capacity is a significant asset.

And yet, while practically all Australians insure their physical assets it is estimated that only one third hold income protection or salary continuanceinsurance.

Let’s consider some compelling statistics:

  • One third of Australian’s are likely to become incapacitated through illness or injury for more than three months before the age of 65. It is more likely to be for illness than injury.
  • More people experience a health condition requiring time off work than there are people unemployed.
  • In a business with three male partners aged 45, there is a fifty per cent likelihood that one will die before the age of 65.

A brief review of cancer, stroke and heart attack diagnoses or incidents each year makes it clear that as we age (and increase our earning capacity) we are also increasingly at risk of serious illness that could significantly curtail our ability to generate income.

And the real impact relates to long-term incapacity from illness or injury. Theearning impact of, say, a broken limb from a car accident might be relatively short and readily recovered. However, a severe spinal injury, cancer or stroke might result in you being out of the workforce for years or decades.

For most people, their financial strategy is highly dependent on their ability to continue to generate income and save it or invest in superannuation, real estate or a share portfolio. Loss of earning capacity causes a severe impact on that ability. For this reason alone, securing your earning ability against the chance of significant incapacity should be considered one of your most important financial planning strategies.

However, even for those who hold income protection, awareness of how best to take it out and what it covers is relatively low.

For example, many people believe that the salary continuance insurance provided in their superannuation cover is sufficient. However, there are potentially substantial shortcomings in cover provided within superannuation. For example, agreed value contracts (where repayments are fixed in line with what you pay for, not what your salary was at the time of an incident) are not permitted by superannuation law. In general, coverage provided within superannuation is basic and the benefits may be very restricted.

Earlier this year the Sydney Morning Herald reported that nearly 60 per cent of Australians were in the dark about income protection. Around 10 per cent weren’t even aware of what income protection is, particularly younger generations.

The reality is that income protection is one of the most important forms of insurance you can hold – without it, if something goes wrong, you may not be able to cover even the most basic living expenses requirements, let alone save and invest for retirement. It is also essential that you understand what your income protection insurance covers and that you source it from a reputable provider with a good track record for responding to claims.

Income protection insurance really is an essential part of your financial planning strategy.

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