Why Income Protection Matters for Aussies

For many people, the ability to earn a steady income is essential to be able to maintain financial security and live a comfortable lifestyle. But what would happen if you became ill or injured, and you were no longer able to work? How would you pay your bills and support your family?

It’s situations like this where income protection insurance comes into play. Income protection insurance provides you with a safety net if you are ever unable to work due to illness or injury, ensuring you are able to maintain financial stability and support yourself or your family while you are off work.

Although this type of insurance is often overlooked in favour of other types of insurance like car , house , and health cover, it’s definitely an important one for financial stability. Not only that, it will also ensure that your family is protected if the unexpected happens and you are no longer able to work.

What is income protection insurance?

As mentioned, income protection insurance provides you with a safety net if you are unable to work due to illness or injury. It does this by paying you a percentage of your regular income during the time you are off work. Usually, this will be 70% of your regular income, though the exact figure can vary depending on the policy and insurer you choose.

Why do you need income protection insurance?

Income protection insurance is seen by many as being an unnecessary extra expense. Whilst income protection insurance may seem like “just another bill to pay”, it is actually crucial if you depend on being able to work and earn a salary in order to support yourself and your family.

There are a number of reasons why you need income protection insurance, including that illness or injury can happen to anyone. Like many, you may believe that “it won’t happen to me” and whilst nobody plans to get injured or fall ill, the reality is that the unexpected can happen to anyone. You may one day find yourself in the situation where you are unable to work due to illness or injury, but the bills just keep coming.

In a situation like this, having income protection insurance can be a lifesaver, because it will provide you with a stable income to continue to cover your expenses while you are off work. Knowing that you won’t have to worry about how you will pay your bills and make ends can offer peace of mind, reducing stress and anxiety and allowing you to focus on your recovery rather than worrying about money.

This will also keep you from experiencing financial hardship. By replacing a significant portion of your income, income protection insurance can help you avoid having to dip into your savings or rely on credit cards and loans. This can help stop you from getting into further debt, which may have a knock-on impact and lead to more financial hardship in the long run.

The other thing to keep in mind is that you may not necessarily be covered by workers’ compensation if you become ill or injured. While you may be eligible for workers’ compensation if you’re injured at work, you won’t be covered in all situations – for example, if you fall ill or are injured outside of work (for instance, playing sport). Likewise, whilst government benefits like the Sickness Allowance and Disability Support Pension may be available to you, these may not be enough to cover your bills and maintain your lifestyle. By comparison, income protection insurance will replace a higher percentage of your income.

What’s also great about income protection insurance is that the premiums you pay for income protection insurance are usually tax-deductible. This means you can reduce your taxable income by claiming the amount you pay in premiums as a deduction, lowering your overall tax burden.

As a general rule of thumb, income protection insurance is advisable for anyone who relies on being able to work and earn an income in order to cover their expenses and support themselves and their family.

There are several other factors that can make income protection insurance even more of a must-have for certain individuals. For example, if you have children or other dependants, income protection insurance can be especially important to ensure they are financially supported if you’re unable to work due to illness or injury. Likewise, if you work in a high-risk or physically demanding job, you may be at greater risk of injury or illness, making income protection insurance more important. The same applies if you have any pre-existing health conditions that could lead to time off work.

The other thing to consider is your current financial position – in particular, the amount of money you have in savings. Ask yourself: do you have enough money in savings to rely on indefinitely if you suddenly become unable to work? Generally speaking, most people will not have enough money in savings to support themselves indefinitely if they are unable to work for a prolonged period of time. For this reason, it is advisable to have income protection insurance as a reliable stream of income if you find yourself unable to work.

There are many considerations that will need to be taken into account to determine which option is best for you: home care or residential aged care However, knowing what type of care you will prefer or require is important because this will influence the decisions you make from a financial planning point of view.

Some of these decisions will include things like what will happen to your family home. You may need to decide whether you will sell your home or rent it out to cover the costs of your care. There may be other options too, such as reverse mortgages, pension loans schemes, and home equity release schemes, that you may be eligible for, which you will also need to consider.

Thought needs to be given to how you will cover your refundable accommodation deposit, if you expect to go into residential aged care. If you do not have sufficient liquid assets to cover this, you may need to think about downsizing, selling off some of your investments, or drawing from your superannuation. Some care providers may also allow you to take a combined approach to payment, so that you pay a smaller refundable accommodation deposit but then also pay daily accommodation payments on top of this. This is another option that you will need to consider if you are concerned about how you will manage to come up with your refundable accommodation deposit.

You will also need to think about how your income and assets will affect your care fees, as well as your pension, taxes, and superannuation. For example, selling your property or investments may be helpful for funding your refundable accommodation deposit or care fees, but this can also come with tax consequences. Likewise, your income and assets will impact the level of government assistance that you are eligible for, so it is worth thinking about how you will structure your assets to minimise means-tested fees.

Both home care and residential care can have different implications for your pension, tax, and estate planning. Therefore, it is highly advisable that you consult with a qualified financial adviser, as they will be able to provide you with specific advice tailored to your personal financial circumstances and preferences for future aged care. They will also be able to help you estimate the cost of care under different scenarios and model how different asset strategies may affect your fees and pension.

Last but not least, it is essential that you ensure you have the proper legal documents in place to back up your financial planning – for example, a will outlining how your assets should be distributed when you die. An enduring power of attorney may also be advisable so that someone else is able to make financial decisions on your behalf, should you become unable to do so on your own. You may also wish to create an advance care directive outlining your preferences for future medical treatment and care. 

Ensuring you have the proper legal documents in place ahead of time will help prevent future stress and confusion, particularly if you experience cognitive decline, dementia, or other health conditions in the future that mean you are no longer able to make legal and financial decisions on your own.

As you can see, there are a number of different matters that need to be taken into account as part of financial planning for aged care. The key is to start the planning process early. Not only will this give both you and your loved ones peace of mind, but it will give you time to think about the different aged care options available to you so that you can make an informed decision about the one that is right for you. This will also lead to a better financial outcome, as you will have the time to seek proper financial advice and manage your assets in a way that minimises financial stress in the future.

How do you get income protection insurance?

Getting income protection insurance is usually a fairly straightforward process. There are a number of insurance providers in Australia who offer income protection insurance policies, and some superannuation funds even offer this as part of their services. This makes it easy to find an insurance provider whose income protection insurance policies fit with your needs and budget.

Before you take out an income protection insurance policy, the first thing you will want to do is get clear around your needs and what you are looking for in your policy. For example, how much of your income do you want to insure? How long do you want the payments to last? How long do you want or need the waiting period to be? How much are you able to spend on insurance premiums? All of these are factors that you will need to take into account.

Once you know what features you are looking to get out of your income protection insurance policy, you can then start assessing and comparing policies from different insurance providers. It is important to look at a number of different insurers and get several quotes to find the one that best suits your needs and budget.

You should also look at options to customise your coverage. A lot of insurers will allow you to tailor your coverage to suit your needs – for example, by adjusting how long you want the payments to last (e.g. 2 years, 5 years, or until age 65), how long you can afford to wait before your payments start (e.g. 30, 60, or 90+ days), and the percentage of your income you want to insure (e.g. 70% or less). There may also be specific options or additional coverage that you wish to add onto your policy, such as coverage for a specific condition.

It is important to note that the options that you choose may increase or reduce your premiums. For example, an income protection insurance policy with a shorter payment time, longer waiting period, and lower percentage of income that you want to insure could work out to have a lower premium than one with a longer payment time, shorter waiting period, and higher percentage of income to be insured. Despite this, having this ability to tailor your coverage to your unique needs and circumstances means that it can usually be customised to fit most budgets.

Once you’ve chosen the policy that appears to be best-suited for your needs, the only thing left to do is apply. Usually, you will just need to fill out an application. However, a medical assessment or other supporting documentation may be required by some insurers, especially if you’re applying for a larger sum or higher level of coverage.

As you can see, income protection insurance is crucial for effective financial planning, as it provides you and your loved ones with a safety net by ensuring you remain financially secure even if the unexpected happens. If you haven’t already considered or taken out income protection insurance, take the first steps to secure your policy today to set yourself and your family up for a secure financial future.

_{This article contains general information about income protection planning. It does not consider an individual’s personal circumstances and therefore before relying on any content, you should ensure that you have obtained individual personal advice from a licenced Financial Adviser.}

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