Without regular income coming in, it doesn’t take long for financial pressure to build up. Getting the right insurance cover can help.
ANZ’s 2018 Financial Wellbeing Report found that almost 3 in 4 Australian adults have less than six months of saved income. On top of that, more than one in five Australian families will be impacted by an insurable event in their lifetime, according to the Lifewise/NATSEM Underinsurance report. Yet 95 per cent of families do not have adequate levels of life insurance.
Coupled with this, a 2016 international comparative study by Oxford University found that Australians in particular underestimate their risk of death, serious injury or critical illness, and have unrealistic expectations of receiving enough government support should they require it. This combination of factors results in Australians being alarmingly unprotected from adverse life events compared to people in other developed nations.
Understanding life insurance cover types
Unlike general insurance which covers assets such as your car and your home, life insurance can protect the financial contribution you make to your family or towards supporting your lifestyle.
There are different types of life insurance that generally cover different life events:
- Life or term life insurance pays a lump sum if you die or are diagnosed with a terminal illness.
- Income protection insurance can replace up to 75 per cent of your regular income (within specified limits and depending on your occupation) if you're unable to work due to illness or injury.
- Critical illness insurance pays a lump sum if you are diagnosed with one of a number of serious medical conditions, such as cancer or a heart attack.
In practice, you may need a combination of these products depending on your needs and existing financial resources. For instance, life insurance won’t usually pay out if you stop work due to injury or illness and doesn’t cover you for involuntary unemployment, so this is why you might want to consider taking out critical illness insurance or income protection insurance.
How insurance helped a family face breast cancer
At 36, Natalie's* life was on a predictable course. She was married with two young children, a mortgage and a job she enjoyed. The family dog completed the picture of a typical Australian family.
Then everything changed. Despite having no family history of breast cancer, Natalie discovered a small lump in her breast. After a mammogram, an ultrasound and a visit to a breast clinic doctor, she was diagnosed with Stage 2 breast cancer.
Not only was she unable to work while she was undergoing treatment, but her husband also needed to take six months’ leave to care for her and the children.
They had health insurance but that would not cover their loss of income. A quick check of their life insurance policy reassured them that they had protection in place that would cover Natalie’s loss of income and out-of-pocket financial costs, as well as making it possible for her husband to take unpaid leave to care for her. That provided peace of mind so they could get on with the job of healing.
Do I need income protection insurance?
Think about what you rely on your income for. If you suddenly couldn’t work due to a critical illness or injury, or if you were made redundant, how would you pay for everyday expenses like your mortgage or rent, utilities, groceries, school fees or other bills?
The reality for those who find themselves in this position is they must make significant changes to the way they live their lives. Such tough choices may include having to sell the family home and move to rental accommodation, switching children from fee-paying schools to the public system, and foregoing luxuries such as family holidays, extracurricular activities and dining out.
If you think you would struggle in this situation, then it’s worth considering income protection insurance.
For a lot people, if something did happen, they'd find themselves in trouble pretty quickly. James Mathison looks into this for us.
What does income protection insurance cover?
Income protection covers up to 75% of your income if you’re unable to work due to an illness or injury serious enough to stop you working. Monthly limits may apply and the amount of cover you will be eligible for will be dependent on your occupation. Some policies also offer family income protection in case your child is seriously ill and you need to take time off work to look after them.
Some insurers offer income protection with redundancy cover as an additional option, in case of involuntary unemployment. Read ‘Does income protection cover redundancy?’ to find out more.
Always check the product disclosure statement (PDS) to understand what you’re covered for, the relevant waiting periods and how to claim. Our income protection FAQs provide more details on what typically is and isn’t covered.
Why sick leave and workers compensation is not enough
Workers compensation can pay you a benefit if you’re hurt while you’re working, but not if you’re injured over the weekend, before or after work, or when you’re on leave.
An injury on the soccer field or a brush with cancer could see you out of action for several months. After your sick leave runs out you could be left without an income, making it hard to cover your expenses and debts. But in most cases income protection insurance will cover you 24 hours a day - both at work and at play.
How much does income protection insurance cost?
Premiums are calculated based on a number of factors including age, gender, occupation, smoking status and the amount of cover you select. Generally speaking you’ll pay less for cover if you’re younger, healthier and not involved in any risky activities. Your gender affects your premium due to differing disability rates between males and females – usually premiums are higher for females.
You could reduce costs by lengthening the waiting period (the amount of time you wait before you’re eligible to make a claim) and reducing the benefit period (the maximum length of time you can receive payments).
Income protection insurance tax deductions could also help offset the costs of your policy. Generally, costs you incur directly related to your ability to produce income may be tax deductible. This could include some of the premiums you pay for income protection insurance, depending on the type of benefits covered under the policy. Read ‘Is income protection tax deductible?’ to find out more.
The best way to plan for your family’s future financial security is to ask, “What if?” What if one parent died or was unable to work due to an accident, illness or permanent disability? With the loss of an income, most families would struggle to meet their daily expenses and ongoing financial commitments.
While families with children have an added incentive to have adequate insurance cover, young couples and singles also need protection. What if you become critically ill and need to take time off work? Do you have enough sick leave to cover the rent or mortgage and other living expenses?
Once you have a clearer idea of the amount of money you would need to preserve your current lifestyle, it’s easier to work out the right level of cover for your circumstances.
*Based on a personal story. Names have been changed to protect identity.