These days, nothing in life seems to stand still, especially our careers. Whether you’re climbing the corporate ladder or building your own small business, it is likely that your income will experience significant growth over the years. However, while an increase in our salary is worth celebrating, there is one thing that many people tend to overlook in the moment: income protection insurance. It is essential to review our income protection insurance policy and make necessary changes to ensure it remains in line with our current situation. If this is a process you’re unfamiliar with, we highly recommend you keep reading.
Income protection insurance is designed to supplement a significant portion of our monthly salary if we are ever unable to work due to illness or accident. These monthly payments are enough to keep up with our mortgage, bills, financial obligations, and standard of living. If your salary increases and your obligations grow, ensuring your coverage will suffice is crucial. Conversely, if you have a change in employment and opt for a lesser salary, making necessary adjustments will ensure that you can always afford your premiums.
What is Income Protection Insurance and Why Does it Matter?
In a nutshell, income protection insurance is a way to safeguard our ability to keep earning money if we are ever unable to work due to unforeseen circumstances. If you’re sidelined from your job due to an accident or illness, it is there to ensure you can keep up with all your financial obligations, and you won’t have to compromise.
Without our income, everything becomes much more difficult. Keeping up with our rent or mortgage, bills, living expenses, education costs, and everything else becomes a nightmare when a household is on a tight budget. In Australia, we have some of the highest financial obligations in the world. This is what makes income protection insurance one of the most important things we can invest in.
Knowing the Risks of an Outdated Policy
When done right, an income protection insurance policy is one of the most effective methods of safeguarding our finances. However, if a policy is left forgotten, it can be a completely different story. For example, if you invested in a policy five years ago and you’ve had a couple of promotions since, your coverage amount is likely to fall short of what you actually need to maintain your lifestyle.
To put it into perspective, if you started a job on $60,000 per year, and after years of dedication, you’re up to $80,000, your policy will be based on what your financial commitments were at the beginning. This means that you would earn a maximum coverage of approximately $42,000 per year, which would slice your monthly income in half. If you were out of work for two or three years, this could result in you downsizing your home and making several sacrifices. An outdated income protection policy can leave you incredibly vulnerable, so it is always worth checking regularly.
How to Tailor Your Policy to Suit Your Needs
One of the most substantial benefits of income protection is that policies are immensely flexible, allowing you to tailor them to completely align with your needs and preferences. Here is what you can decide when it comes to reviewing and amending yours:
1. Benefit Amount
You can choose a benefit amount of up to 70% of your monthly pre-tax income. This means you can ensure your policy aligns with your needs, preventing you from under- and over-insuring yourself.
2. Waiting Period
You can also choose how long you wait before the benefit starts paying out. So, if you have some savings and want to reduce your premiums, you can opt for a longer waiting period.
3. Benefit Period
You can also decide how long you want to receive the benefit for. If you’re close to retirement age, you can reduce your premiums further by selecting a shorter period to cover you until your Super kicks in.
4. Indexation
It is always worth checking to see if your provider allows you to opt for indexation. This means that your benefit amount will grow with inflation, giving you an extra layer of peace of mind.
5. Additional Features
Some policies also come with additional benefits, such as supporting you through rehabilitation after an injury or a specific injury lump sum. This is certainly worth looking into.
How to Calculate the Best Policy for You
If the idea of reading terms and conditions, reviewing your policy, and assessing your financial needs sounds complicated, don’t worry; it doesn’t have to be. The best way to think about it is to ask yourself what you would really need if you were unable to work tomorrow. Here is a short guide to help:
● Identify Your Essential Expenses – This should cover your mortgage/rent, food, education costs, medical expenses, and utilities.
● Non-Essential Things You Don’t Want To Miss Out On – This could be anything, from yearly holidays to online memberships.
● Calculate What You Want – Usually, 50-70% should cover all of the above.
● Go Over Your Savings – If you have substantial emergency money put away, you can choose a longer waiting period to lower your premiums.
● Compare and Assess Benefit Periods – Take a look at the risks of your current job, how long you have until retirement, and choose a benefit period that will provide you the most peace of mind.
The Benefits of an Up-to-Date Policy
As you can see, keeping your policy up-to-date plays a significant part in the efficiency of your income protection insurance. Doing so will provide peace of mind regarding your finances, give you financial stability, and allow you the time you need to recover if you face a serious illness or accident. Furthermore, the premiums for income protection insurance may also be tax-deductible, depending on your job, so you can have all of this without ever breaking the bank.
Remember, if you have an income protection insurance policy and haven’t looked at it for a while, check on it and make sure it will always provide the support it is designed to give you.
