What will happen when your sick leave runs out?

Date: 01/09/2010

Lifewise is coordinated by the Investment and Financial Services Association (IFSA) and is being funded by special contributions from IFSA's life insurance and reinsurance.

"Income protection insurance protects you should you lose your income due to illness or injury."

Despite the fact that almost every working Australian has some level of life insurance cover within their super, Australia has proved to be one of the most underinsured nations in the developed world. 83% of people insure their car, but only 31% insure their most important asset - their income.

Lifewise is a public awareness initiative of the life insurance industry aimed at addressing Australia's high levels of underinsurance. The goal of Lifewise is to encourage Australians to understand the risks they face and encourage them to take appropriate steps to protect themselves and their families from the financial hardship that can result from an accident, sickness or death. For more information and to find out if you have enough cover visit www.lifewise.org.au.

According to new Lifewise/NATSEM research released earlier this year, one in five Australian families will suffer the unexpected death of a parent, a serious accident or an illness that renders a parent unable to work. The research also found that 95% of working Australian families do not have adequate insurance in place. Such high levels of underinsurance amongst parents with dependent children and a mortgage can have an enormous impact on the future of the family.

Income protection (or salary continuance insurance) is a form of personal insurance which provides an income stream for you should you become unable to work due to illness or injury. Depending on the level of cover you select, income protection insurance can pay up to 75-80% of your income to cover your day to day expenses if you are unable to work.

"Income protection insurance protects you should you lose your income due to illness or injury."

Why would I need income protection insurance?

If you answer yes to any of the following questions, you should consider insuring your income earning capacity. It is after all your most valuable asset.

Do you have any debts such as credit card, personal loan or mortgage?
Do you have an investment property that depends on your income to top up the repayments?
Would your sick leave run out after a month off work?
Do you have a family that relies on your income for day to day living expenses such as household bills, school fees and utilities payments?
Are you self employed?
Do you work within a tight budget for your living expenses?

Even if you already hold income protection insurance, it is essential to review your cover regularly. For example, if you change employment, your sick leave entitlements, although they were accruing with employer A, will not transfer across to employer B.

Therefore you may need your income protection waiting period to be reduced for at least the first 12 months with your new employer. If you have an investment property, especially a negatively geared property that relies on your income to meet the mortgage repayments, you need to consider protecting your ongoing ownership of the property. Income protection insurance is not the same as mortgage insurance. Mortgage insurance protects the lender should you default on your home loan repayments. Income protection insurance protects you should you lose your income due to illness or injury. In some circumstances, income protection insurance premiums are tax deductible because they are related to earning an income.

During your lifetime you have the capacity to earn a small fortune - it makes sense to protect your income through a tax effective income protection plan.