BEING in the insurance business, my people are often asking their clients: "What is the biggest asset that you have to protect?"
The answer is usually the same: "My home."
Most people forget to mention their health and ability to earn a living. This is without a doubt our biggest asset - lifetime earnings, for most Australians, equal between four and six times the value of the equity in their homes.
But while we insure our house, car and boat, most of us don't protect our incomes.
We did some research into this phenomenon, interviewing more than 500 employed people aged 20 to 45 on the eastern seaboard, most of them earning between $50,000 and $100,000 a year. Forty per cent of them had kids.
The first thing that leapt out at me from the research was that just 3.1 per cent were unaware of income-protection insurance.
In other words, Aussies know about protecting their incomes. Yet 83 per cent of Australians have comprehensive car insurance, while just 6 per cent protect their income.
But it was the ones in between the "insured" and "not insured" who intrigued me: 31.7 per cent of the respondents said they didn't think they had income protection unless it was provided by their super fund.
I like the fact tax breaks are given to people who source their income-protection insurance through their super funds, because it ensures that many working people have cover should they become sick or if they are injured.
Plus, paying insurance premiums through super frees up personal cash flow for living expenses and household bills. However, because super is compulsory, many members don't pay much attention to what they are actually getting from their fund. And the fact is, three out of five of the big industry funds don't have income protection as a default option, so if you're relying on an industry fund to look after you in this respect, you could be out of luck.
Thousands of Australians haven't checked the insurance components of their super accounts.
And those funds that do have default income protection have strings attached: one of Australia's largest industry super funds enforces 90-day "wait" periods before you can draw the income insurance and it has "capped" monthly payouts at $850, regardless of how much you actually earn.
I believe this is a matter that breadwinners should take control of, regardless of what they believe is the "default" insurance in their super.
You should see an adviser or a broker about this. You are looking for three things:
Monthly earnings (you'll be covered for up to 80 per cent of current earnings)
Wait period (can be as low as two weeks)
Duration of payout (usually ranges from one year to retirement age)
If you haven't investigated these policies before, I urge you to at least talk with an insurance broker or financial adviser. You should have a policy that suits a full-time, part-time or self-employed person and it must be a policy that covers what you need without you paying for what is irrelevant.
The cost is also an important factor in relation to income protection. Our research shows 42 per cent of people thought it was too expensive, even though a 40-year-old white-collar worker can be covered for $1.50 a day.
So how much does it cost? It depends on a number of factors, including the selected monthly benefits, age, profession and smoking status.
Here are four scenarios that we sourced:
Finance manager, male, 41 years old, non-smoker, insuring a $5000 monthly benefit (30-day wait 12-month benefit). He will pay $39.52 a month.
Nurse manager, female, 35 years old, non-smoker, $4000 monthly benefit (30-day wait 12-month benefit). She will pay $41.42 a month (if a "hands-on" role, it rises to $53.32).
Domestic plumber, male, 29 years old, smoker, $5000 monthly benefit (30-day wait 12-month benefit). He will pay $72.21 a month.
Gardener (unqualified), 47 years old, female, non-smoker, $3000 monthly benefit (30-day wait 12-month benefit). She will pay $117.56 a month.
In the end, it's your call. There are some tips, too: you can take income-protection insurance in your super but you can also buy it personally and claim the premiums as a tax deduction. Also, most companies will offer policies that cut off at 60 years old but many are now extended to 70 - but you have to ask, which is why I suggest talking to a professional broker.
Start by at least asking what you would do in the event of illness or injury. Be honest with yourself and then talk to an expert.
Mark Bouris is executive chairman of Yellow Brick Road Wealth Management. See ybr.com.au.
Frequently Asked Questions about this Article…
What is the single biggest asset most Australians should protect?
While many people name their home, the article says your health and ability to earn (lifetime earnings) is your greatest asset — for most Australians this equals about four to six times the equity in their home. That means protecting your income is often more important than just insuring property.
How common is income protection insurance compared with other types of insurance?
The article reports most people know about income-protection insurance but few buy it: only about 6% of Australians protect their income, while 83% have comprehensive car insurance. Just 3.1% said they were unaware of income protection, but many still don’t have cover.
Does my superannuation (super) automatically provide income protection cover?
Not always. The article notes many members assume super provides cover, but about 31.7% thought they had income protection via super when they might not. Around three out of five large industry super funds don’t include income protection as a default, and funds that do can have limits such as 90-day waits or capped monthly payouts (for example, $850). You should check your super account details.
What are the key things to look for in an income protection policy?
The piece recommends focusing on three things: the monthly benefit (policies can cover up to about 80% of your current earnings), the wait period (some policies start in as little as two weeks, others have longer waits), and the duration of payout (ranges from one year up to retirement age).
How much does income protection insurance typically cost?
Cost varies by monthly benefit, age, job and smoking status. The article gives examples: a 41‑year‑old non‑smoking finance manager insuring a $5,000 monthly benefit pays about $39.52/month; a 35‑year‑old nurse about $41.42/month (rising to $53.32 if it’s a hands‑on role); a 29‑year‑old smoking plumber about $72.21/month; and a 47‑year‑old gardener about $117.56/month. It also notes a 40‑year‑old white‑collar worker can be covered for roughly $1.50 a day.
Should I take income protection through my super fund or buy it personally?
Both options have pros and cons. Through super you may get tax breaks and free up personal cash flow, but default super cover can be limited or have long waits and payout caps. Buying cover personally means premiums can be tax deductible and may offer more tailored terms. The article suggests discussing the choice with an insurance broker or financial adviser to suit your situation.
How long will income protection pay out — until I’m 60 or 70?
Many income protection policies historically cut off at age 60, but the article says some providers now extend cover to age 70. Policy age limits vary, so you need to ask the insurer or your broker about the specific end age for payouts.
What should I do next if I haven’t checked my income protection or super insurance?
The article urges you to be honest about what you’d do if you became ill or injured and then talk to an expert. See an insurance broker or financial adviser to review your super’s insurance components and find a policy that covers what you need — whether you’re full‑time, part‑time or self‑employed — without paying for irrelevant cover. The recommendation comes from Mark Bouris, executive chairman of Yellow Brick Road Wealth Management.
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