Income Protection Insurance: How to Protect your Most Important Asset

Your ability to earn an income is one of your greatest assets, and yet only 31% of those who are self-employed and 6% of employees have income protection insurance [1].

For how many weeks could you maintain your lifestyle and financial obligations if you are unable to work? How long before you had to start selling your 'stuff' to meet your commitments? Income protection insurance usually pays up to 75% of your income after an accident or illness until your return to work. You can also insure your future super contributions. 

Income protection insurance is designed to protect your lifestyle to enable you to meet ongoing financial commitments such as mortgage repayments, school fees and living expenses.

For a business owner, income protection insurance is especially important. When choosing your terms of insurance, you should consider the financial viability of your business as well as your personal financial obligations if you were unable to work. For example, in addition to meeting your personal financial obligations, you may also need to pay a replacement salary for someone else to look after the business temporarily, continue to pay rent, vehicle lease payments, insurance premiums and the interest on loans.

She'll be right, mate
There is a worrying trend in Australia when it comes to protecting ourselves, with 95% of Australian families not having adequate levels of insurance [2].  Our 'She'll be right' attitude doesn't correlate with reality when it comes to accidents and illnesses.

One in three Australians will be affected by an accident or illness and require time away from work for more than three months [3].  It is estimated that 38% of working Australians would last less than a month without their income before needing to sell assets [4]. Further, it is estimated that 20% of mortgage defaults are due to an accident or illness of a person in the household [5].

While many people hold income protection insurance through their superannuation, these policies generally have a limited benefit period and inferior policy definitions. Default policies are not tailored to your specific circumstances or stage of life and can result in you being underinsured. It is estimated that 45% of industry fund super fund members are underinsured by $1,000 per month for income protection insurance6.

Getting the most from your income protection insurance
For true peace of mind and protection when you need it most, it's important to consider a policy that is appropriate for your circumstances and stage of life. Policies usually specify a maximum time period or age limit for the benefit period, usually two to five years, or up to the age of 60 or 65. However, not all insurance protection policies are the same and it's important to seek professional advice.

Boost your protection
If you became ill or unable to work and needed to rely on income protection insurance, at 75% of your income, would you need to make lifestyle adjustments? You can boost your income protection with trauma insurance. 

Sean earns $100,000 per year and supports his wife and young daughter. He has a $250,000 mortgage of which he pays approximately 25% of his salary into repayments each year. Sean already has income protection insurance which he knows will cover approximately 75% of his annual income if he is unable to work due to an accident or illness. Sean's financial advisor recommended that he consider a trauma insurance policy of $250,000, based on his current personal situation.

Sean suffered a heart attack and was deemed unfit for work. He was able to use his $250,000 trauma cover to pay out his mortgage, reducing his monthly expenditure by 25%. Sean's income protection insurance is now sufficient to cover his other monthly living expenses without compromising his lifestyle so he can concentrate on recuperation.

For more information about income protection insurance, please contact Tony Bates at ADX Wealth on (02) 8115 9262 or by emailing

Tony Bates is a Financial Advisor for ADX Wealth and licensed under AFSL 500640.
The information (including taxation) contained within this document is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. ADX Accountants and ADX Wealth strongly suggest that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.

1. TNS/IFSA investigating income Protection Insurance in Australia July 2006 and CommInsure 23/1/2008
2. Lifewise/NATSEM Underinsurance Report - Understand the social and economic cost of underinsurance February 2010
3. TAL and FSC Under insurance key facts study 2009
4. Zurich Misinsurance Whitepaper February 2014
5. Mortgage default in Australia: nature, causes and social and economic impacts, Australian Housing and Urban Research Institute, March 2010
6. Sweeney research. A joint report by The Australian Institute of Superannuation Trustees (AIST) and Industry Funds Forum (IFF) 2008