How do you arrange income protection?

It is often set up with a four-week waiting period before benefits begin, which keeps the premium down and allows, where possible, the person to utilise their employer’s sick leave prior to benefits kicking in.

Once the pre-set waiting period is over, the monthly payments, which are taxable, begin. Generally, payments would be paid monthly in arrears but might be sooner depending on the circumstances and the policy. These payments are usually set at around 75% of the individuals insurable income.

As previously mentioned, some policies also offer the choice of a tax free, lump sum payment. This does affect the potential tax deductibility of the premiums, usually bringing the deductible portion back from 100% (when outside a superannuation account) to 90%.

Questions that a financial adviser may ask you to consider:

• Am I the sole income earner?

• What is my total annual income?

• What are my total debts and expenses?

• How many dependent children do I have?

• How long might my savings last if I was unable to work?

• Could my partner pay all of the bills and expenses if I was unable to work?

If the answer to the final question is no, especially if medical costs are added to the expense list, then it is very much worth organising an appointment with an adviser to discuss income protection insurance.

Consider the options

There are several types of income protection insurance that offer various options, benefits and tax advantages. It pays to discuss the options with your financial adviser to ensure the cover matches your lifestyle, budget, income and debt levels, and dependents. As your career and lifestyle changes, it’s also worth re-visiting the policy, with the help of your adviser, to check that it is still suitable for your current circumstances.

If you’re already covered by income protection, it may be helpful to discuss personal insurance with friends and family who may not recognise its value. The severe financial consequences of serious illness and accidents can affect all of the people around the victim. The experience is never a good one, but the removal of financial issues makes the recovery period, or the rehabilitation and ongoing treatment, more manageable.

Case study

Income protection insurance offers a person suffering injury or illness, and their family, to concentrate on what is important: rest and recovery.

For example, a financial adviser recommended that his 35-year-old client Edward, an IT consultant at a large investment bank earning $142,000 per annum, take out income protection insurance with a total and permanent disability (TPD) option. The policy would offer a monthly benefit of $8,875 and would have a three-month waiting period and benefit period paid to age 65.

After a serious motor vehicle accident, Edward suffered a major head trauma and a spinal injury which left him a quadriplegic. His insurance case manager felt it would take around three months to assess the claim fully so organised for an immediate bed confinement payment of $27,000 to be paid to Edward.

The policy also contained a Boosted Disability Benefit which raises the monthly benefits by 33%, meaning Edward’s monthly, taxable payments lifted to $11,833.33. Rather than taking the monthly payments, Edward decided to receive a tax free, lump sum payment of $2,262,000. This helped cover medical costs and rehabilitation care and also allowed him to pay off his mortgage and commence modifications to his home.