Protect your ability to earn

Paul Clitheroe
Paul Clitheroe

Imagine this. You're running around the beach with the kids, or working out at the gym, when you suddenly twist and hurt your back. Without warning you're off work - not for days or weeks, but for months. We all like to think this will never happen to us - but it does, and if you're left without your regular income even for a short period you could be pushed to financial breaking point. That's why income protection insurance is so important.

This type of cover, also known as disability or salary continuance insurance, protects what is undoubtedly your most valuable asset - your ability to earn an income. It can keep vital cash coming in if illness or injury prevents you from working.

Despite the merits of this type of cover, only around one in four workers has income insurance in place. Yet according to research by Canstar, more than 34,000 income protection claims were paid out last year. Surprisingly, among the more common reasons for making claims were anxiety, depression and general stress-related illnesses.

You may have income insurance in place, or be able to purchase it through your super fund - and this is something worth checking as it can be cheaper this way. Otherwise, income insurance can be purchased separately through insurance companies.

It's worth knowing that organising cover while you're young and in peak health may make it easier to obtain cover at a later stage. This is due to a feature known as 'guaranteed future insurability'. It's a benefit included in the majority of income protection policies - either automatically or as an optional extra. It means that once you've been accepted for a policy, the insurer can't generally knock you back in the future as long as you've been honest about your personal details and your premiums are up to date.

If you have major debts like a home loan, or you are raising a family, income insurance makes a lot of sense. The premiums vary widely and among the key factors that determine how much you'll pay are the amount of cover, whether or not you smoke, your occupation and how long you're prepared to wait before insurance payments kick in. The usual waiting periods are 14, 30 and 90 days. The longer the waiting period, the lower the premium.

On the plus side, you can normally claim the premiums as a tax deduction, which helps to make the cost more manageable.

For more on how income insurance works, take a look at my book Making Money.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit for more information.

Topics:  opinion paul clitheroe

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