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Protect your income

In our busy lives, we often forget, or just plain don’t know, about the importance of insurance to prepare us when the unexpected occurs. An accident or illness can have dire effects on your finances, and I’m not just talking about hospital bills. Don't forget about having to eat, pay for utilities, phone bills, school fees, car maintenance fees, petrol and the list goes on.

A survey conducted by the Australian Bureau of Statistics in 2001 showed that over 2 million people in Australia have a long-term condition that resulted from an injury. That’s 12 per cent of the Australian population!

I recently received a query from a reader of this newsletter asking whether it’s possible to protect his income in the event that he is unable to work due to an accident or a debilitating disease.

The answer? There sure is! It’s called income protection insurance. Even better you can claim the cost of the insurance as a tax deduction. Or you can structure the insurance so that instead of you paying for the insurance, your superannuation pays the monthly premium leaving you with more money to spend on the important things in life.

Take this case study from ING into consideration:

Jim is a 43-year-old maintenance manager at a large manufacturing firm. A few years ago, he and his wife Therese were expecting their third child. They had just moved into a larger home, and with it came a bigger mortgage. Therese was working two days a week to help cover the costs, but the couple had no money left over after expenses. As Therese planned to return to full-time employment after the children were older, they were not concerned about not being able to save.

One day, Jim developed severe lower back pain, and after a visit to the doctor, was diagnosed with a slipped disc. His job in maintenance required him to be active with a fair amount of manual activity. Jim had 20 days sick leave, but this depleted quickly.

Fortunately, Jim had a comprehensive income protection policy. Three months after diagnosis of the slipped disc, the claim started to be paid at 75 per cent of his previous salary. If Jim had not taken out this policy, there was a possibility that he would have to sell the new house to cover all the expenses that began to pile up.

Included in the policy was provision for the insurance company to pay for rehabilitation and retraining costs to assist Jim getting back to work. Following six months of rehabilitation, the insurance company helped Jim re-skill as a purchasing manager. Along with Jim’s employer, the insurance company assisted with getting his workstation ergonomically redesigned in order to support his lower back.

Twelve months later, Jim was back at work and no longer needed any claim payments and due to this experience, he continues his income protection insurance policy year after year.

Jim’s foresight came in handy. Taking out income protection insurance ensured he could continue his lifestyle while on the road to recovery, and seamlessly move back into the workforce, albeit in a position more suited to his condition.

I have found that people like Jim are an exception to the rule as most people have not even thought about protecting their income. However most people have thought to protect their car by taking out car insurance. Let's look at this in more detail. So you have car insurance and your car is worth say $45,000 while you earn $70,000 each and every year (and you hope to earn more). Over 25 years, ignoring any pay increases, you could be expecting to earn $1,750,000. So which is it better to pay for, insurance to protect your car worth $45,000 or tax deductible insurance to protect 75 per cent of  $1.75 million.

Now, if you have a car accident you can replace your car.  But if you hurt your back, can you replace it? Unfortunately not and in fact I find this is exactly when a lot of people see the light and want to have income protection.  Unfortunately once you have an injury that stops you working, you cannot get someone to give you money for nothing.  So what happens in this case is if you cannot work (permanently) you end up on the disability support pension which pays you $237.95 per week (that’s only $12,373.40 pa). Can you live on $237.95 per week especially if you have children and a mortgage. How would you survive?

So having income protection insurance gives you peace of mind, knowing that your family is financially protected in the event that you can’t work.

A tax effective strategy that not many people are aware of is that it’s possible to pay for your insurance premium out of your superannuation. The major benefit of this is that it doesn’t affect your cash flow. You may also be able to make salary sacrifice contributions to super equal to the cost of the insurance premium. This means you are paying for the insurance and receiving one tax deduction for a contribution to super then your super fund may also credit your account with a further tax deduction when the insurance premium is paid. This can also result in big savings for you and this strategy can also be used for life insurance as well as disability insurance.

If you would like to find out more about the cost of income protection and/or ask about using your super to pay for your insurance you should speak to your adviser.

Alternatively Switzer Financial Services would be happy to discuss your circumstances, show you what options are available and help you structure the right level of insurance at a reasonable cost. Click here to book a complimentary initial appointment.

Published on: Monday, July 20, 2009

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