No job? No worries. This insurance gives peace of mind if you can no longer work

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Have you ever thought about what would happen if you suddenly lost your ability to earn money? I’m not talking about losing your job and having to find a new one, which frequently happens. I’m more talking about falling ill or getting into an accident and being physically unable to do your job.

It’s a harrowing prospect, especially for anyone with dependants or a hefty mortgage to service, so with any luck, it’ll be something you never need to worry about. However, for additional peace of mind, you can take out what’s known as income protection insurance, which does pretty much what it says on the tin: if you can’t work due to a temporary disability or illness, it’ll pay you a regular income for a specified period.

Many Australians don’t have income protection insurance, assuming their super will protect them in the case of illness or disability.Credit: Michael Howard

Income insurance is of middling popularity, with a study from last decade showing just 31 per cent of Australians have it. This is likely because super funds provide workers with total disability insurance as a default, with some also providing income insurance too (it’s worth checking if yours does).

What’s the problem?

Most of us are probably pretty happy to leave it at that, however, your income protection through super can be pretty limited, and not all funds offer it. And, as a Money reader emailed to point out this week, there can be a number of intricacies with income insurance that can make the decision, and the process, perplexing.

What you can do about it

If you’re thinking about taking out a policy, here are some things to consider:

• Retail v group insurance: Group insurance is generally where a single entity, such as a super fund or your employer, takes out a policy on behalf of its members/employees. Super funds may offer group insurance income protection as a default, or provide members an option to pay for it as an extra. Dawn Thomas, financial advisor with The Wealth Designers, says group cover can be pretty limited, and may have various exclusions. “Outside of super you have access to income protection policies which can have broader occupation definitions of claim, and the premiums are tax-deductible to you personally (as opposed to your super fund),” she says. “The terms of cover outside of super tend to be more comprehensive and are generally underwritten before they go into force. This means you know what you are getting.”

• Keep retirement in mind: Paying for cover within your super is convenient and means you’re not out of pocket, which can be an attractive offer from a money-saving perspective. However, opting for retail cover preserves your retirement funds, as any debits can affect the compounding of any investment returns, says Grace Bacon, director at RSM Financial Services Australia. “If you don’t have sufficient contributions going into your super fund, premiums may erode your superannuation balance over time,” she says. “If you are paying the premiums outright, make sure you budget for this expense.” Much of this will depend on your own circumstances, and it’s about striking a balance between managing your cashflow and growing your super.

• Stepped v level premiums: When researching policies, you may see these terms used. Stepped premiums increase as you age and the risk of injury/death increases, meaning they’re cheap when you’re young and expensive when you’re older (keeping in mind most income insurance policies only last until age 65). Level premiums do not increase with age, meaning they cost more initially but work out cheaper over time.
• Do I need income insurance? What level of cover should I get? I know I say this a lot, but this is something that entirely depends on your own circumstances. Bacon agrees, saying there’s no “magic formula”, though she says it’s useful to work through various “what if”′ scenarios to determine if you need cover, and what sort. Consider your budget, you and your family’s financial situation (including debts and expenses), and the status of your dependants. As always, get professional advice if you’re struggling to decide.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.