Are there alternatives to income protection?
The average Australian is fiercely independent at heart. They are proud of their ability to create a lifestyle for their families and are prepared to work hard to achieve it. When it comes to insuring their ability to earn income, however, many choose not to take up income protection insurance or simply never consider whether they need it. Perhaps it is our self-sufficient nature which leads us to think we can stand on our own two feet, no matter what adversity comes our way. But how wise is this attitude?
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When it comes to the security of yourself and your family, it is vital to make a balanced judgement, so let’s look at what your options are if you choose not to have income protection insurance.
Can you self-insure by saving?
Many of us are quite good at saving when we have a specific goal in mind and it makes sense to regularly put a few dollars aside from every pay packet into an ‘emergency savings account’. While this is a prudent thing to do, will it be sufficient to provide relief if a serious illness or injury strikes?
The main concern over relying on your own savings to replace income is the amount of time it will take to build up sufficient savings to cover an extended absence. Think how long it would take to save enough to cover a year’s worth of income? While it’s important to have emergency savings on hand, it’s unlikely it will provide the immediate and comprehensive coverage that income protection provides for serious illnesses or injuries.
What about social security?
In Australia we enjoy a generous social security system for those in greatest need, but how reliable or adequate will this be if you become sick or injured for a significant period?
The current Disability Support Pension has a base rate of just under $400 a week for a single person and just short of $600 a week for couples. This might provide some basics, but how close does it come to replacing your income? What other steps would you need to take to make up the shortfall for the weekly living expenses you incur now? Would you need to sell your home or other assets just to survive?
Setting up an income protection plan is a good long-term solution
Could you rely on others?
A strong family network may be of some comfort when you are struck by a major setback such as an illness or injury and no doubt some family members would be willing to chip in if you are in financial strife. This might be useful if it is a short-term situation and you can arrange to pay them back without too much trouble, but what if you need extended support for a longer period? Chances are that family will not have the resources to provide indefinite financial assistance, but more to the point is the fact that you would not want to rely on family handouts. The same self-sufficiency we pride ourselves on would also make it difficult to rely on charitable organisations too.
Take action to retain your independence
The only practical long-term solution to income loss owing to injury or illness is to set up your own income protection plan. This instantly creates an independent source of ongoing income to maintain lifestyle, without reliance on family, charity, government or dipping into savings. A small monthly, usually tax-deductible, sacrifice to pay income protection premiums can give you the ability to remain standing on your own two feet during even the most serious of medical conditions.
Tailoring your cover to suit your needs
To ensure that you can obtain the most economical cover with a sufficient level of protection, it’s important to consider how your income protection will be structured. Some of the major factors in tailoring your cover include:
- Setting your ‘waiting period’ – a key aspect of income protection cover is the ability to nominate set waiting periods that will apply to each claim. This works in a similar way to an excess on your car insurance. A waiting period of four weeks, for example, would mean that your injury or illness would need to keep you off work for at least four weeks before eligibility for any payments would arise. The general idea is that you set a waiting period that kicks in after your sick leave arrangements at work run out, so there’s no overlap. The longer your waiting period, the cheaper the premium will be.
- Setting your ‘benefit period’ – this refers to the maximum period that you will be able to claim benefits for in the event of a long-term claim. Most plans will offer benefits that are payable right up to age 65, so that your entire income earning lifetime is covered if a major illness or injury leaves you unable to ever return to work. Shorter benefit periods are also available at a lower cost to accommodate your budget if needed.
- Amount of cover – a typical income protection plan will allow you to set a monthly benefit that is based on 75 per cent of your gross income. While some people may prefer to insure a higher proportion of their income, insurance companies have generally determined that this would cause too high an incentive for spurious claims and would therefore make premiums prohibitively high.
- Agreed value versus indemnity cover – generally speaking there are two styles of cover available:
1. An agreed value option that allows you to set the amount of cover, regardless of whether your income drops at the time of your claim
2. An indemnity style option that will take pre-disability income into account in determining your benefit payments. The greater security offered by agreed value cover means it will probably cost more than indemnity cover.
- Policy ‘extras’ – to increase the quality of cover you may be able to add optional extras into your plan for such things as rehabilitation expenses, bonus payments if death or terminal illness occurs or early payment of benefits during the waiting period if a claim is due to an accident.
Keep your independence in the toughest of times
An income protection plan is the most effective and economical way to maintain your independence and dignity if sickness or injury takes away your income earning ability for an extended period. A Bridges financial planner can help you construct a plan that will best fit your budget and your insurance cover requirements.
Have you or has someone you know ever suffered income loss due to a sickness or injury? Share your experiences below.