Your most important asset
Most of us are aware of the need to prepare for our long-term security and this is evident by the increased interest in superannuation and other long-term investments.
However, preparing a long-term plan is also about protecting you from unforseen risks that could occur through life’s journey. We tend to take for granted that we will be able to work and earn an income. But if your income suddenly stops, as a result of an injury or illness, it can have devastating results on your plan and harm you and your family’s future security.
When asked what our greatest (physical) asset is, many people state their house and see the importance of insuring it and its contents. Yet many of us overlook our income. You might be surprised how much you may earn in your lifetime and therefore, how important it is to protect your income. For example, if you are aged 40 and earn $1,550 per week, you could earn more than $3.8M* before you turn 65. No matter how large or small your package is, generally it supports your family, your bills, your loan repayments and your lifestyle.
*assumes a 5% pa salary increase
How does the strategy work?
Income protection can be a flexible and tax-effective way to protect the asset that creates wealth for you and your family. If you suffer from an illness or injury and are unable to work, income protection can pay a monthly benefit; typically of up to 75% of your pre-tax income/package to replace your lost earnings. While the protection can be measured against your pre-tax earnings, benefits paid are tax assessable as income.
You can insure for a range of benefit payment periods, with maximum cover generally up to age 65, as well as a range of features, options and benefits, giving you the choice to select the income protection most suitable to you. Most income protection plans offer a range of waiting periods (the length of time you have to wait before your benefit starts accruing) and benefit periods (the maximum length of time you will receive the benefit). As a general rule, the shorter the waiting period and the longer the benefit period, the more the protection will cost. If cost is a consideration, it is generally better to trade off a longer waiting period rather than shortening the benefit period.
Income protection generally provides up to 75% of pre-tax income/package in the event of a disability.
Income protection premiums are generally tax deductible (but remember that the benefits paid are assessable as income).