We talk to financial adviser Michal Bodi about Income Protection, also known as Salary Continuance insurance. Most people rely heavily upon the income they generate from work and through this Q and A we will discuss the opportunities to protect that income.
Why should I consider Income protection?
Insurance is not something we need, but rather something we want. We want to have a plan B in case of something important doesn’t work out, so we insure it. Purchasing insurance is a way of transferring risk to someone else (the insurance company).
Generally, Income Protection will cover up to 75% of your salary against sickness and injury. The time -frames from when cover may commence and finish are normally flexible and will vary depending upon your line of work, current health and your budget.
A good way to decide what type of insurance to choose is to consider two factors:
- What is the likelihood of a particular tragedy
- What would is the probable financial impact
The fact is that we are generally three times more likely to get seriously sick or injured (be off work and unable to earn income) during our working life then we are to die. The financial consequences if our income stops can be just devastating.
Think about it, what would happen if you didn’t get paid next week, and the week after… and what about six months or even few years…how quickly would the envelopes start piling up under the door?
In financial terms, our lifestyle as well as any long term wealth creation plan is relying on our income. Our plans will only be successful if we give them enough time to work. It’s essential to ensure our income will continue if we ourselves cannot continue to work.
It would be irresponsible to assume everything will always work out according to our plans. That is not planning, that is called hoping
That’s why the income protection forms an important part of every successful wealth creation strategy.
Does Income Protection cover me against losing my job?
No. It only protects you if due to health reasons whereby you are unable to perform at least one important duty of your usual occupation. It is very occupation specific. It looks at your ability to work in your particular occupation. The benefit continues to be paid while you are off work.
The moment you are well enough to go back to work, the benefit stops (because you start earning your usual income again).
I have Workers’ Compensation, why would I also need Income Protection?
Income protection is your personal protection for which you personally pay. You select the benefits, and you are covered for as long you pay the premiums.
Workers’ compensation is a legislative requirement from government. It was designed to protect employers against workplace claims from employees.
Workers compensation only covers work related injuries and illnesses. However, most people suffer from injuries and illnesses that occur outside of the workplace.
Workers’ compensation should be seen more as a limited employment benefit than an insurance cover. Those relying on workers compensation may also be impacted by legislative changes.
Can you be covered if you participate in dangerous sports like skydiving?
The short answer is yes. Every application is individually considered and is subject to the underwriting process. The availability of cover for the ‘risky’ hobbies differs amongst the insurers. It is usually a matter of matching the right insurer with the client.
Is Income Protection expensive?
The cost of any insurance cover is cheaper with younger age and is more likely to be accepted with no exclusions and/or loadings. It’s also important to consider the long term affordability of the cover where so called level premiums make a lot of sense. They ensure your cover will not get more expensive with your age and you will be able to afford it all the way to retirement.
There are different ways to structure the income protection cover to fit the individual client circumstances, including arranging it via superannuation where the premiums are not payable from client’s cash-flow. Income protection is something so crucial to the overall wealth strategy that the cost is rarely something that would stop my clients implementing it.
In summary – The price is often a misleading factor. I see it as an investment to secure your future. It is vital not to get fooled by the marketing hype that is now swamping our TV, computer screens and radio. As with most things in life, you tend to get what you pay for.
What are the tax consequences of Income Protection?
Income protection premiums are generally tax deductible and the claim payout is taxable. The insurer generally pays out the full amount and it is up to the claimant to ensure the relevant tax is paid. Tax should be considered when you discuss the cover with your adviser.
I’m self-employed with a limited taxable income, what should I do?
It’s not unusual the self-employed people often end up declaring a low taxable income due to the amount of expenses they claim. This is obviously a problem when it comes to income protection insurance as you can only insure your taxable component, not the full assessable income.
To counter this issue, it is recommended they consider business expenses insurance. This insurance will cover their work related overheads.
Should I get advice from a Financial Adviser, or just go online?
I am glad you asked as this comes up all the time. It’s imperative to realise we are looking at two separate issues – product and advice. There are plenty of products in the market which can be purchased online, some really good, some not so good. If you know where to look you can find quality providers that offer quality products. But products are only carriers of the solutions to your problem.
You need to identify the problem in the first place and set up a strategy to address it. This is where quality financial advice makes all the difference.
The critical issue is to understand what cover is suitable and why, how it fits into your overall plan and how you go about claiming it when you need it.
Picking products without having a plan in place is an equivalent of online shopping for heart attack medication without going to see the doctor.
We always take the easier and less painful option, that’s human nature. But always remember the rule of thumb – the easier and cheaper it is to obtain the cover (especially those without underwriting attached), the harder it is to claim it (and you will be on your own).
As mentioned, there are online options, however, you generally take greater responsibility for your own decisions.
One last point, financial advisers are now available online. I’m regularly involved at helping people through Skype, email and of course, the telephone. Contact Michal Bodi