If you’re 50 or older and think income protection insurance is just for high-flying young corporate types, you may need to think again.
Sure, an income protection policy can set you back several thousand a year, possibly more depending on your age, occupation, and many other factors. Do you really need such a premium?
Leading insurance provider AMP says ‘yes’. Here are some reasons why.
- Income is your most important asset.
Income protection insurance is most commonly taken out by professionals and small business people, partly due to its cost, as you’d expect. But AMP financial planner Anthony Jones asserts that this is leaving a majority of people approaching retirement dangerously underinsured.
Jones says that outside of the death cover, income loss is probably the biggest risk most people carry if they don’t have a cover.
“The key thing for most people is you’re more likely to have a claim over 50 than you are at 25 so the risk is starting to increase too much to ignore,” he says.
According to lifeinsurancefinder.com.au, one in three Australians will be diagnosed with cancer before the age of 75. Over 60 per cent of Australians will be disabled for a period of over one month during their working life and 25 per cent will be disabled for longer than three months.
In addition, over 2.6 million Australians under the age of 65 have suffered a physical disability.
- Flexible with benefits.
Income protection pays up to 75 per cent of your income, usually on a monthly basis, and unlike many other types of cover, it offers a comprehensive range of extras like business, family and retirement benefits, even a premium waiver under certain conditions.
If you qualify, a policy will automatically cover everyday expenses and repayments and any super or commissions you may have missed out on. You can choose a lump sum or regular payment, a stepped or level premium, and in some situations, your payment will increase with CPI or an agreed amount.
So unless you’ve got enough assets to live on and can retire tomorrow, protecting your income this way looks like a no-brainer.
Following this logic, all other insurances become irrelevant if you have no income with which to pay their respective premiums.
Blowing the Plan
If you’re like many people over 50 who are still working, you might have kids out of the nest and a mortgage either paid off or under control for the first time in your life. You may be starting to realise retirement isn’t that far off and be saving up hard.
“The last thing you can afford when you’re nearing retirement is to lose your ability to save,” Jones says. “That could place everything you’ve worked for over the years in jeopardy.”
On the other hand, with the significant shift in the age at which people have families and the amount of debt carried into later life, many people in their 50s still have a significant need for insurance to cover dependents, repayments, and the cost of living.
“The first thing you do when you buy a house or a car is insured it, but when you get a job no one tells you to take out insurance,” Jones points out. “I’d suggest this needs to change. The sooner you insure, the more affordable it becomes.”
Reading the Fine Print
Anthony Jones says the key thing for over 50s to know about income protection is the effect of its terms.
- When will the money come in?
“Some elements to note would be the waiting period. The time you need to be off work before a claim will be paid can vary and can be negotiated,” he explains.
“We do find many people want to discuss increasing waiting periods to reduce the cost of their premium.”
- How long will I be covered?
It’s also essential to check the length of your policy.
“Some policies only pay for a maximum of two years, some for five, while others will pay until the end of working life – generally age 65,” Jones points out.
In addition, make sure to ascertain what additional benefits may be offered under the policy.
Most policies cease at age 65 (unless a different policy term is selected) and can no longer be renewed. Therefore, it is important to understand how long the policy will last compared to its cost. Each individual needs to decide whether a policy is right for them.
- Tax break
One thing people often don’t know is that income protection premiums are generally tax-deductible.
“People maximising their superannuation contributions each year may be better off holding their income protection policy outside of the superannuation environment so their retirement benefits are not reduced,” Jones advises.
“Additionally, because products held in superannuation must comply with specific definitions, there are typically more features and benefits available outside superannuation.”
When Would You Make a Claim?
- An income insurance claim can be made if you have been away from work due to illness or injury and you have served your policy’s waiting period.
Selected by the customer, waiting periods are typically 30, 60 or 90 days.
“Some good quality policies enable claims to be made for specified injuries or illnesses even if the insured person is able to return to work,” Jones says.
- You can also make a claim if your income has been reduced as a result of an accident or illness.
In this instance, an insurer will approve coverage based on definitions of whether you are partially or permanently disabled.
If you’re only partially disabled, the insurer will make decisions about to what degree your duties can no longer be performed and whether your income loss is 20 per cent or greater.