If your income stopped today, who would pay your bills? Your partner, your parents? Or do you have enough savings to meet expenses for the rest of your life? If the answer is no, then you should consider income protection insurance.
Your ability to generate an income is arguably your greatest asset, yet only 31% of self-employed Australians and 6% of employees have income protection insurance, despite findings that indicate one in three Australians will be kept from work by an accident or illness.
Imagine suddenly being unable to meet your financial obligations including mortgage payments, living expenses and school fees. In this article, we discuss important income protection information for mining and resources professionals and business owners.
“She’ll be right, mate”
While Australians are generally positive and optimistic, there’s a worrying trend when it comes to protecting ourselves financially. 95% of Australian families don’t have adequate levels of insurance cover, with our “she’ll be right’ attitude not corresponding with the reality. For example:
- One in three Australians will be affected by an accident or illness that will keep them away from work for more than three months
- It is estimated that 38% of working Australians would last less than a month without their regular income before needing to sell assets
- It is estimated that 20% of mortgage defaults are due to an accident or illness of a person in the household
These statistics show how important it is to consider having appropriate income protection insurance that safeguards your lifestyle and that of your family, now, and for the future.
Income protection insurance is designed to protect you with an ongoing monthly income if you’re unable to work due to illness or injury, enabling you to:
- Meet ongoing financial commitments such as mortgage repayments
- Cover your day to day living expenses
- Take the time you need to fully recover without being forced back to work by financial burdens
Income protection policies can be established in various ways, with consideration given to the benefit period (the length of time the benefit is paid for in the event of a claim) and the waiting period (the length of time you wait before receiving your first benefit). Furthermore, income protection premiums are generally tax deductible which reduces the after-tax cost to you.
Income Protection cover provided by your employer
You might think you’re sufficiently covered if your employer pays for your income protection insurance cover or the cover is provided through your employer’s preferred superannuation fund. What you may not know is that these policies can have disadvantages compared with other policies (some of which are significant), including:
- The benefit period may be shorter and the waiting period may be longer than what’s required for your personal situation. These policies may only have a benefit period of two years, which can make you susceptible to a dire financial outcome if you end up being unable to work for a period exceeding this two year benefit period.
- The definition of being unable to work due to illness or injury is typically more restrictive under these policies.
- Some policies provided by employers or an employer-preferred fund have what’s known as a pre-existing conditions exclusion, which can cause uncertainty around what you can and can’t make a claim for. This can be compared to an income protection policy which is underwritten upfront which means you’ll know upfront what you will and won’t be covered for. This can provide some confidence in the event you need to make a claim.
- Cover not being guaranteed as renewable. This means that the insurer could cancel your policy and cease providing you coverage with no notice. On the other hand, quality income protection policies where cover is guaranteed as renewable means the insurer must continue to provide you with cover while you continue to make premium payments.
- As detailed in the ASIC Life Insurance Claims Report from 2016, there were higher claim denial rates on direct and group insurance policies compared with policies provided through a financial adviser.
While there are generally some significant disadvantages to employer-provided income protection insurance policies, it’s important to seek expert advice. There can be instances where, due to health or lifestyle reasons, retaining these policies can be valuable for you and your family.
If you’re a business owner in the mining and resources sector, chances are that you won’t be able to rely on the same benefits as your employees, such as sick leave and workers’ compensation claim entitlements.
As a result, income protection insurance is especially important for business owners. This insurance can cover your personal and business financial obligations by replacing income while you’re unable to work. When considering details for income protection insurance, you should consider the financial viability of your business as well as personal financial obligations if you were unable to work.
Cover for redundancy
We are frequently asked whether you can have an income protection policy that provides a benefit in the event you are made redundant. There are insurance policies which offer cover for being made redundant, but they are highly restrictive and may only offer a limited payment for a short period of time (the maximum benefit for some policies is only 1-3 months). Typically, these policies are offered by lenders, with the benefit they pay limited to the minimum repayments on a home mortgage for a short period of time. The condition of when you can claim is generally limited to a forced redundancy type scenario, rather than a voluntary redundancy or resignation.
Rather than relying on an insurance policy to cover the event of a redundancy, we encourage and work with clients to ensure they have a cash buffer available in the event they are out of work due to redundancy.
A tailored solution
Resources Unearthed contributor Stratus Financial Group can work with you to tailor an income protection policy to suit your circumstances. Additional benefits such as critical illnesses, including heart attack, cancer or stroke can also be incorporated into your policy.
Video: Do I Need Income Protection?
If you would like to find out more about how to protect your most important asset, please contact Resources Unearthed on 07 3007 2000 or firstname.lastname@example.org
Resources Unearthed is a solutions hub that provides integrated financial, legal, accounting & business, and property services for executives, professionals and business owners in mining and resources.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions.
TNS/IFSA investigating income Protection Insurance in Australia July 2006
Lifewise/NATSEM Underinsurance Report – Understand the social and economic cost of underinsurance February 2010
TAL and FSC Under insurance key facts study 2009
 Zurich Misinsurance Whitepaper February 2014
 Mortgage default in Australia: nature, causes and social and economic impacts, Australian Housing and Urban Research Institute, March 2010