I reckon Australians are generally a pretty optimistic bunch, however there’s a big difference between having a relaxed outlook on life and leaving the important things to chance.
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A report by Suncorp shows about 12.4 million Australian workers don’t have income protection insurance. Yet our ability to earn a regular livelihood is arguably our most valuable asset. As a guide, government figures show full-time adult average weekly earnings are currently about $1517, or $79,000 annually.
At that rate, you could pocket total earnings of about $4 million over a working life.
That’s serious money — and a convincing argument to take out income insurance.
The idea behind income protection insurance is simple.
It pays a regular stream of cash, usually equal to 75 to 80 per cent of your normal wage if you can’t work due to illness or injury.
That’s money to pay the rent or mortgage, buy groceries, pay the children’s education costs and manage the other expenses we face in our lives.
What’s worrying is that many of us don’t have a backup plan if we weren’t able to earn an income.
According to Suncorp, one in five workers would rely on government hand-outs.
One in four don’t have any sort of plan at all.
As we reach the end of the holiday season and the kids head off to school, it’s worth reassessing how well you would manage if something happened to your ability to earn an income.
Sure, there are plenty of statistics around showing the odds of contracting a serious illness, but injuries can happen from something as simple as getting dumped in the surf at the local beach or being involved in a car accident.
In life, as in investing, it’s not a matter of avoiding risk altogether. The key is to manage the risks we face with appropriate insurance cover.
You may be able to arrange income protection cover through your super fund, or you can choose to buy it independently through a separate insurance company. The premiums vary widely depending on your age, any pre-existing health conditions you may have, whether or not you smoke and your occupation.
If you organise cover outside of super, the premiums can normally be claimed as a tax deduction. Be sure you know exactly what is covered and what isn’t before you sign up — this is vital.
Take note of the waiting period that applies before you start receiving payments — it can range from 30 to 90 days, as well as how long payments will be made for.
For more on income protection insurance and how it works, talk to your financial adviser.
Paul Clitheroe is a founding director of ipac, chairman of the federal financial literacy board and chief commentator for Money magazine.