For most people, their ability to earn an income is their greatest asset. And yet, while we don’t think twice about insuring our car or our house, Map My Plan’s 2015 Financial Fitness report shows that less than a quarter of working Australians are insuring their income.
The question is: why?
For the most part, it’s probably because they’re simply not aware of the facts about income protection insurance and the significant benefits it provides. But another, more alarming reason is the myriad of myths and misunderstandings surrounding this particular type of life insurance.
From believing that you’ll be adequately covered by the government or your super fund to straight out assuming that young, healthy people don’t need it, there are countless myths and stories swirling around that are keeping Australians from properly protecting their income.
But despite what is thought to be common knowledge, income protection insurance is a vital consideration for anyone who earns – and relies on – an income. Read on to separate the facts from the fiction!
Myth #1: I already have enough life insurance
Income protection insurance, while another form of life insurance, is actually very different to standard term life cover. Instead of paying out a lump sum benefit to your dependents after you die, income protection insurance works by replacing your income if you are suddenly unable to work because of an illness or injury.
It pays up to 75% of your current income in monthly instalments, allowing you to continue to meet your ongoing costs and living expenses – which aren’t going to stop just because your income does!
In fact, the report found that one in four working Australians already struggle to pay their bills on time and make ends meet. Many also have insufficient emergency savings, with 30% of people saving less than $100 a month, and a frightening 10% with so little saved up that they would fall into debt if they were to lose their job (or stop working for a time).
Having a backup income plan in place will go a long way to helping you get through a period where you were too ill or injured to work, and this is more important than ever if you don’t have much in savings. How would you fund your treatment and rehabilitation costs as well as pay for your bills, rent or mortgage, and household expenses?
So while income protection insurance and life insurance are indeed very different insurance products, they actually work hand-in-hand to provide ongoing financial protection and support no matter what happens.
Myth #2: Young, healthy people don’t need it
When you’re in the prime of your life, you don’t want to think about things not going to plan. But the fact is, anyone can get sick or injured to the point of not being able to work, no matter how young and healthy you are.
Misfortunes can strike at any time and it’s vital to be prepared, because without an income, even the smallest costs of daily life can be a huge burden to meet. And if you’re unwell or injured and trying to recover, this will be a huge added stress in an already difficult time.
The good news is that when you’re young, premiums are lower and very affordable – even on a single income. For example, an 18-27 year old male in a clerical role can take out a TAL Income Protection Plan of $2,000 per month (which won’t completely replace your income but would be enough to keep you afloat until you returned to work) for around just $35 a month.
That’s comparatively less than what you’re likely to spend on coffee or take-out!
The bottom line? Just because you’re young and healthy, it doesn’t mean you’ll never need a backup plan. It always pays to be prepared.
Myth #3: My private health insurance will cover me
Private health insurance will certainly cover you for some of your medical expenses if you’re being treated for an illness or injury. But unfortunately, that’s where it starts and stops. Private health cover is only for medical bills related to your treatment and recovery, and won’t provide any sort of income stream or payment to help you cover your household bills and debts.
Basically, it won’t replace a lost income.
And what’s more, many private health insurance plans won’t cover the total cost of your treatment or rehabilitation, either. Depending on the level of cover you have, it could leave you with a significant gap that you’ll need to pay out of pocket.
To make sure you have every angle covered, it’s important to have a complete protection plan in place which includes both private health insurance and income protection insurance (or other forms of life and disability insurance). This will ensure that no matter what happens, you’ll always have a replacement income to fall back on.
Myth #4: The government will look after me if I get sick
While government assistance is available through Centrelink for people with a temporary illness or injury and can’t work, it’s not a sure thing. There are a number of rules and requirements you have to meet to be eligible, and even if you do manage to get through all the red tape, the allowance won’t take you far.
The Sickness Allowance pays a maximum of $527.60 per fortnight for a single adult with no children if you’re temporarily unable to work because of an illness or injury, which isn’t even close to the average Australian’s fortnightly wage. If you do have children you could receive a maximum of $570.80 per fortnight, and if you’re partnered the maximum you can each receive per fortnight is $476.40.
So while the government will provide some assistance, it’s in no way enough. With ongoing bills and household costs to cover, as well as your treatment, rehabilitation and medical expenses as you recover, you’ll be left with a massive funding gap that adequate income protection insurance could easily save you from.
Myth #5: I’m covered through my super
You might already have income protection through your super fund, but there’s a very high chance that you probably don’t have enough. The default level of cover is typically quite low, will only cover you for a certain length of time, and is based on the overall number of members within the super fund – meaning it’s unlikely that you’ll have enough to cover all your expenses when you don’t have an income to fall back on.
Plus, the life and income protection insurance policies included in your super are usually indemnity value based, which means that when you claim, the benefits you receive will be determined by how much you’re earning at the time.
If you do already have cover under your super fund, it’s important to find out exactly how much and if necessary, either top it up or take out a second income protection policy outside superannuation to cover the shortage.
Myth #6: My sick leave or workers’ compensation will provide cover
This is true, but only to an extent. Neither will provide adequate cover for an extended period of being unable to work and earn an income.
Sick leave for most employed Australians is about 10 days or 2 weeks a year, and once your sick leave and any other personal, annual or other type of leave is used up, your employer is not obliged to keep paying you in your absence. And if you are self-employed, then any time you take off is only coming out of your own pocket.
Workers’ compensation, meanwhile, only covers accidents or injuries that happen in the workplace (and then only if you are eligible to make a claim). This means that for the wide majority of accidents and illnesses that are not directly caused by your job, you’re not covered.
According to the Australian Bureau of Statistics, 531,800 people experienced a work-related injury or illness in 2013-14. Of those, only 34% received financial assistance through workers’ compensation, leaving the greater majority of workers without any sort of financial support through their recovery.
The bottom line: you can’t rely on your sick leave or workers’ compensation to adequately cover you when you’re temporarily unable to earn an income. It’s not a guaranteed thing, and when it comes to your livelihood, you simply can’t afford to take the risk.
Myth #7: It’s too expensive
This is one of the most common – and most mistaken – reasons for why so many people don’t take out income protection insurance. But for most Australians, a moderate level of income protection cover is actually very affordable. It’s generally no more than 3% of your annual income, and if you opt for fewer extras, can be as little as 1.5%.
Plus, it’s usually tax-deductible! And if you choose to hold some of the insurance in your super fund, the premiums are paid out of your account balance instead of your income so you won’t even notice it.
There are plenty of options available for affordable income protection insurance. And when it all comes down to it, the benefits of protecting your income, health and lifestyle no matter what happens always far outweigh the costs.