Opinion
My income protection costs $362 a month. Is it really worth it?
Nicole Pedersen-McKinnon
Money contributorHi Nicole, last week you wrote that the biggest opportunity for a tax deduction is to pre-pay your income protection insurance. You said: “If you don’t have this, you need it. Forget your house: your income is your most valuable asset.”
I have income protection insurance for an agreed amount of about $80,000 a year. My premium is $362 a month (sadly pre-paying is out of the question currently). Is it really worth it? I am scared too, but in light of how tight my finances are already, I am seriously considering dropping it. Can you convince me otherwise? Rachael
You never know what life might throw at you, so income protection insurance can provide some peace of mind.Credit: Simon Letch
Let’s start by clarifying that you absolutely should not forgo insurance on your house, Rachael – it’s essential to have enough to rebuild the roof over your head if it were destroyed.
But my point last week was this: what would you do if sickness or injury meant you weren’t able to earn income? Income protection insurance falls under the risk category of insurance. This is not about protecting stuff but protecting yourself and/or your family.
Different types of risk insurance will be required under different circumstances – single, married, dependants, debts. But I believe income protection – which usually replaces 75 per cent of your income if bad health leaves you unable to work – is necessary no matter what.
If you were single, how would you pay for things without, well, pay? Even if you were coupled and have no kids, I’m assuming your income is pre-committed. And once you have dependants and/or debts, it’s baked into what you fork out.
But even I have considered dropping income protection before … and written about it in this column.
It was after I fought breast cancer, when I was extremely disappointed that the fact I didn’t take any continuous time off work meant no income replacement payout – just a token amount of money for having spent seven nights in hospital.
This might have been different had I had a shorter than 90-day waiting period.
But that speaks to the biggest way to make income protection insurance affordable: the longer you are willing to wait before income replacement payments start, the less you’ll pay in premiums. This becomes a sufficiently safe strategy if your emergency fund can cover that delay. And three months’ salary should always be your goal.
You mentioned you have agreed-value insurance, Rachael. This is like gold now, or it is unless your income has risen significantly higher, as regulator APRA removed these policies from sale in April 2020. They cost insurers too much, and they also disincentivised people to return to work.
Typically, payouts on new policies today are based on what you earn in the 12 months before claiming (problematic with lumpy income or for the self-employed). You proved your income when you applied for your policy – your potential payout is known and non-negotiable.
Because payouts are taxable, income protection is also – as you allude to – tax-deductible. Your premiums are lopped straight off your assessable income. So, how does it fit in with other insurances?
It’s very likely that in your super, you have some life and total and permanent disability insurance, which pays out if you are (perish the thought) totally and permanently disabled.
It’s very unlikely that this is enough, but you might be able to lift it to that level more cheaply within your super … where it may be more appealing right now that premiums come out of your fund, not your pocket.
The other vital piece of your protection puzzle is health insurance. This is its own insurance beast – not considered in the general or risk categories. But there are tax perks for these premiums, too – rebates and avoiding the Medicare Levy Surcharge up to 1.5 per cent if you earn over $93,000 as a single or $186,000 as a couple (2023-24).
It’s health insurance that I credit with saving my life because it gave me the option to immediately remove my cancer, avoid all further and ongoing treatment, and remove the risk of recurrence.
From me, with my money, I would cut out holidays before I cut out my private health insurance – I just take steps to cut the cost. But I still hold income protection insurance. Being without it just made me too nervous.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter or Instagram.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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