Income Protection Insurance

Who’s going to pay the bills if you can’t?

Imagine if you stopped getting paid next week. How long would you be able to cope financially? Bills won’t stop coming in. And if you have debts, the bank won’t stop charging interest.

But accidents happen. So do illnesses. In fact a recent Institute of Actuaries report found that one in every three Australians will be unable to work for more than three months at some stage in their lives because of sickness or injury. That’s 30% of working Australians.

You may have sick leave from your employer, but this may run out before you are well again. Worker’s Compensation will only apply to an injury that happens at work – what if you become ill, or injure yourself at home?

Income Protection Insurance can cover most of your needs

Income Protection will pay you up to 80% of your pre-tax income if you can’t work because of sickness and injury. This money could go a long way to keeping your household, or your business, running while you concentrate on your recovery.

(Since income protection is replacing your salaried income, any benefit payable is taxable, just like normal income. The good news is that premiums are tax deductible.)

Premium level vs quality of the policy

When applying for income protection, you decide on two major factors that control the premium:

  • a waiting period after a disability occurs before income protection cover commences:
    • premiums become progressively cheaper the longer you nominate for a waiting period
    • the waiting period can be as short as 14 days. It is typically 30 days for people with cash reserves or sick leave. It can be much longer.
  • the benefit period for which payments will be made:
    • the longer the potential benefit period, the higher the premium
    • most people choose to age 65, but it can be as short as two years.

The Income Protection policy you choose should be based on the quality of the policy, not the premium you pay. There is no point in having a cheap policy if it doesn't pay when you need it.

How we assess quality

At Archimedes Financial Planning, we have access to independent actuarial assessment of the quality of each policy from major Australian personal insurance companies. Actuaries review every word in the policy conditions, and then determine the quality of the policy, an overall “Needs” number is assigned that ranks the quality of the policy.

To illustrate this, suppose a 40-year old male earning $80,000 pa gross wanted to insure $5,000 per month, with a 30-day wait for benefits payable to age 65. The chart below shows a cross-plot of policy quality (“Needs”) versus a first-year premium (excluding policy fee and stamp duty).

Income Protection: Policy Quality vs. Annual Premium

You can see from the chart that price is not an indicator of quality.

At Archimedes Financial Planning, we work closely with our clients to find the best quality policy given your budget and occupation.

Do not leave it until something happens - contact us today for a no-obligation review of your personal insurances, and protect those dependent on you!

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  • Professionals of any age
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