When investing in property, be it your own residence or an investment property, it’s important to be clear on your property investment strategy. Your Buyer Agent will undoubtedly walk through your investment strategy, but one area they should touch on is what financial safety net you have in place. Unforseen risks (such as falling ill) can quite quickly deplete your cash making it difficult to meet mortgage repayments, rent, renovations, household expenses, child’s education etc, so it is important not only to have a cash buffer but also the right investment strategy plan in place. Income protection can be part of this plan and whilst it isn’t suitable for everyone (some choose to self insure through strategies such as a positively geared portfolio), it will come down to your risk profile, financial capabilities and current employment arrangements. As with any insurance it is always in the policy fine print, so here are a few things to keep in mind when it comes to Income Protection insurance?
Income protection insurance, what is it?
Income protection insurance when discussed in relation to property purchasing, is often mistaken as mortgage insurance. This isn’t the case, with mortgage insurance being a lender requirement when your property loan exceeds a threshold compared to the property value, and is there to protect the lender should you default on the loan.
Your ability to earn income is in all likelihood your best asset, and income protection insurance enables you to insure this income should you encounter an event (such as physical injury) which inhibits this ability. You should keep in mind that your sick leave is finite and whilst workers’ compensation will likely cover you for injuries suffered in the workplace, outside of this you will not be covered for injury or illness that prevents you from working.
Not only does it provide regular payments to meet your expenses the piece of mind it provides also can’t be understated.
Income protection insurance, how does it work?
Income protection insurance is effectively a risk-management strategy when it comes to purchasing property and is structured so that you receive an ongoing income stream equivalent of up to 75% (I haven’t come across higher, presumably since at 100% there is little incentive to recuperate quickly) of your nominated pre-injury/sickness income (can include fringe benefits and allowances etc). Whilst typically it isn’t designed for situations where you become redundant, there are policies that will cover this to some degree.
The duration that you will receive payments for is dependent on the income protection policy you secure but can be anywhere from 2 years to the age of 65. Other points to keep in mind that can differ to other forms of personal insurance:
- You should be able to claim multiple times on income protection insurance;
- Income protection insurance premiums are normally deductible for tax purposes (some income protection is not deductible); and
- Benefit payments from income protection are typically taxable.
Tips and comments on income protection?
Income protection insurance premiums will range from 1 to 3 per cent of your gross annual income depending on your policy selection (benefit duration, waiting period etc) and personal circumstances such as age, health, sex, income and occupation as well as the specif. For example blue collar can attract higher premiums than white collar workers, and personal health aspects such as weight will also be a consideration.
It is worth noting that most policies will pay benefits in arrears so with a 60 day waiting period you may not get paid benefits till up to 90 days after making a claim. Longer waiting periods should result in lower premiums (worth talking to your adviser in regards to how much sick leave you have accumulated as well as your cash buffers and tie that in with your wait period). Your benefit period will begin after the waiting period and continues for the duration of the policy (set amount of years 2,3,5 or nominated age such as 60 or 65) or until you are fit enough to return to work.
If starting earlier in your life with a policy (and plan to hold it for the long term), it normally works out financially cheaper to lock in ‘level’ premiums to that of ‘increasing‘ premiums, with level generally incurring only CPI level increases.
Other areas you may want to pay particular attention to:
- Check the policy insures your specific occupation and doesn’t state you aren’t covered if you can do other types of work (i.e. if you are an electrician and injury yourself and are no longer capable of performing your job, but you aren’t covered because you could work in admin). Some occupations are not covered by income protection;
- If you earn income from other sources, what and how much will be deducted from your benefits; and
- You can get income protection within super funds but these may not provide as many benefits or be more restrictive to access.
Should I get income protection?
It is up to the risk appetite of the individual in question and also their personal circumstances. Income protection is definitely not for everyone but it should be a consideration when planning an investment strategy. As with any insurance policy you need to shop around and check the policy details to make sure they meet your requirements (keep in mind these are also very likely to vary over time).