Paul Clitheroe.
Paul Clitheroe.

Why you should get income insurance

FOR working Australians the regular flow of cash from our wage or salary is the thing that keeps households ticking over, but only one in three people directly insures their income.

The idea behind income protection insurance is pretty straightforward. You can insure yourself for about 75-80% of your income if you can't work because of illness or injury.

This type of cover fills an important gap left by workers' compensation insurance, which only kicks in if your illness or injury relates to work.

If you have life cover through your super fund, income protection insurance may be bundled with it. If it turns out you have income protection insurance in place, be sure you understand how it works.

Funds tend to provide one-size-fits-all policies, which may not suit your circumstances.

If you're not protected, or you'd like to tailor your cover, it is possible to organise directly held cover of your own.

The three key factors that shape premiums are whether you smoke, your age and the sort of job you have.

As a guide, research group Canstar found a 27-year-old (non-smoking) male accountant could pay monthly premiums of $42 for cover worth $3125 per month.

A 52-year-old accountant would pay about $105 each month for the same level of protection. In contrast, a 20-something truckie could pay monthly premiums of $63 for that same $3125 monthly payout.

On the plus side, premiums for income protection insurance can normally be claimed on tax as any payout you receive is taxable.

If you're strapped for cash, holding income insurance through your super fund may be fine.

If you're approaching retirement and you'd like all of your super contributions to go towards your nest egg rather than insurance premiums, arranging directly held income protection insurance may be the right strategy.

Your financial adviser can point out the best approach.

Check out the Canstar website for its star rating of income insurance providers, or for more ideas on protecting your income, take a look at my book, Making Money.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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