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How to take out income protection insurance

Mark Bouris

Being in the insurance business, my people are often asking their clients: “What’s the biggest asset that you have to protect?”

The answer is usually the same: “My home.”

Most people forget to mention their health and ability to earn a living. This is without a doubt our biggest asset - lifetime earnings, for most Australians, equal between four and six times the value of the equity in their homes.

But while we insure our house, car and boat, most of us don’t protect our incomes.

We did some research into this phenomenon, interviewing more than 500 employed people aged 20 to 45 on the eastern seaboard, most of them earning between $50,000 and $100,000 a year. Forty per cent of them had kids.

The first thing that leapt out at me from the research was that just 3.1 per cent were unaware of income-protection insurance.

In other words, Aussies know about protecting their incomes. Yet 83 per cent of Australians have comprehensive car insurance, while just 6 per cent protect their income.

Not so super

But it was the ones in between the “insured” and “not insured” who intrigued me: 31.7 per cent of the respondents said they didn’t think they had income protection unless it was provided by their super fund.

I like the fact tax breaks are given to people who source their income-protection insurance through their super funds, because it ensures that many working people have cover should they become sick or if they are injured.

Plus, paying insurance premiums through super frees up personal cash flow for living expenses and household bills. However, because super is compulsory, many members don’t pay much attention to what they are actually getting from their fund. And the fact is, three out of five of the big industry funds don’t have income protection as a default option, so if you’re relying on an industry fund to look after you in this respect, you could be out of luck.

Strings attached

Thousands of Australians haven’t checked the insurance components of their super accounts.

And those funds that do have default income protection have strings attached: one of Australia’s largest industry super funds enforces 90-day “wait” periods before you can draw the income insurance and it has “capped” monthly payouts at $850, regardless of how much you actually earn.

I believe this is a matter that breadwinners should take control of, regardless of what they believe is the “default” insurance in their super.

You should see an adviser or a broker about this. You are looking for three things:

■ Monthly earnings (you’ll be covered for up to 80 per cent of current earnings)

■ Wait period (can be as low as two weeks)

■ Duration of payout (usually ranges from one year to retirement age)

If you haven’t investigated these policies before, I urge you to at least talk with an insurance broker or financial adviser. You should have a policy that suits a full-time, part-time or self-employed person and it must be a policy that covers what you need without you paying for what is irrelevant.

The cost is also an important factor in relation to income protection. Our research shows 42 per cent of people thought it was too expensive, even though a 40-year-old white-collar worker can be covered for $1.50 a day.

So how much does it cost? It depends on a number of factors, including the selected monthly benefits, age, profession and smoking status.

Here are four scenarios that we sourced:

■ Finance manager, male, 41 years old, non-smoker, insuring a $5000 monthly benefit (30-day wait; 12-month benefit). He will pay $39.52 a month.

■ Nurse manager, female, 35 years old, non-smoker, $4000 monthly benefit (30-day wait; 12-month benefit). She will pay $41.42 a month (if a “hands-on” role, it rises to $53.32).

■ Domestic plumber, male, 29 years old, smoker, $5000 monthly benefit (30-day wait; 12-month benefit). He will pay $72.21 a month.

■ Gardener (unqualified), 47 years old, female, non-smoker, $3000 monthly benefit (30-day wait; 12-month benefit). She will pay $117.56 a month.

In the end, it’s your call. There are some tips, too: you can take income-protection insurance in your super but you can also buy it personally and claim the premiums as a tax deduction. Also, most companies will offer policies that cut off at 60 years old but many are now extended to 70 - but you have to ask, which is why I suggest talking to a professional broker.

Start by at least asking what you would do in the event of illness or injury. Be honest with yourself and then talk to an expert.

Mark Bouris is executive chairman of Yellow Brick Road Wealth Management. See ybr.com.au

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