Hi Tammy, I am in my 50s, have paid off my mortgage and am now focusing on saving for retirement. My income protection insurance premiums keep going up. Do I still need this cover? Vinh, Manly
Hi Vinh, there are two things you should consider when deciding whether to insure a particular risk – what are the consequences to you if you do not have cover when an insurable event happens; and what is the likelihood of you making a claim.
The potential consequences, and whether you are happy to accept these, are personal to you. If you are reliant on your income to cover your lifestyle and save for retirement, both your current standard of living and your capacity to retire as planned would be impacted if you can’t work. You may be happy to accept a reduction in your lifestyle. You may have access to sick leave, long service leave and Centrelink. Regardless, where there is a gap between the lifestyle you wish to have and the lifestyle you could afford, insurance bridges this gap.
We generally underestimate the likelihood we will need to make a claim, but we all know someone who has suffered a sudden, unexpected health problem. The likelihood of being unable to work due to ill health increases as you age. The likelihood of being able to rehabilitate and return to work reduces as you age. The financial consequences of being unable to work generally reduce as you get closer to retirement, but the likelihood of making a claim increases.
Assessing any insurance is a trade- off between the premium cost and the claim benefit. Generally, people see the value in insuring their car against potential damage. For example, agreed value comprehensive car insurance on a $50,000 car garaged in Manly may cost around $1,000 per year. If the car is written off, the benefit received is $50,000, less the $2,000 excess.
Income protection is generally more expensive than car insurance, but the potential benefit can be significantly greater. For example, income protection for a 50-year-old male office worker, earning $100,000 per year, may cost around $3,500 in the first year. As income protection premiums are tax-deductible, the net cost is around $2,400. If unable to work, the benefit received would be $5,833 per month until age 65, a before- tax benefit of more than $1 million over a 15-year period. In addition, a contribution of $958 per month would continue to be made to super.
If you feel the cost of your cover still outweighs the potential benefits, income protection cover is flexible. You can potentially reduce the premium by adjusting the terms, the sum insured, the benefit period and the waiting period.
Quick Tips: Income protection insurance underwent significant changes
in late 2021 and premiums for older style policies have increased significantly.
Review with a financial adviser before making any policy changes. Once
cancelled, you may not be eligible for new cover.
Feel free to call me on 8376 0350 if you have any further questions or need assistance.
Regards, Tammy.
Tammy Marshman and Up Wealth Sydney Pty Ltd are Authorised Representatives of Consultum Financial Advisers Pty Ltd, AFSL number 230323, an Australian Financial Services Licensee.
This is general information only, as in preparing it we did not take into account your personal objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate for your personal circumstances. Although the information is considered reliable, we do not guarantee that it is accurate or complete and you should not rely upon it.
Please seek financial advice specific to your situation before making any financial, investment or insurance decision.