Certainty matters: getting income protection right
Last month Jess fell down the staircase in her apartment resulting in a very serious ankle injury. She is expected to be unable to work for at least two months as a result of the surgery and complications with her recovery.
Jess is a 30 year old who has two jobs: her main job is as a learning support assistant at a primary school, where she works about 30 hours a week, and she also works one night a week as a disability support provider. Jess earns $1,760 a week from her main job, and $600.00 a week from her second job, totalling $2,360 a week.
According to Safe Work Australia, only 3.5% of working people experienced a work-related injury or illness in the previous 12 months, and according to the Financial Services Council, most income protection claims are as a result of an accident, and the AIHW reported that most injuries occur at home or playing sport: in other words most people who can’t work don’t qualify for workers compensation because it is most likely that they are off work as a result of something that happened outside of work. Australia’s workers compensation system is state/territory based and hence where you work, or who you work for, can make a difference to what you get and for how long. It is one more reason why the right income protection is so important and something an adviser can really help with for a client.
Luckily, Jess has an indemnity income protection policy she took out to cover her total income of $2,360 a week, rather than just one job. With an income protection policy taken out last year, Jess could receive up to 90% of her income every week for 6 months, then up to 70% until age 65 for as long as she was unable to work (depending on the policy), and these benefits could be indexed over time if her policy allowed for it. She would need to meet the policy conditions, but if she did she would be paid monthly based on the actual income she had been earning up to the limit of her policy. Under some older income protection policies, Jess could have been entitled to 90% of her income up to age 65.
It is really important to compare policies as some providers allow higher percentages of income to be covered but limit the benefit period to 5 years. And the cost can vary too. This is where a comprehensive insurance strategy can be really important. It may be better to hold more than one income protection policy: one that has a short waiting period and short benefit period (hence lower cost) and another that has a longer waiting period and longer benefit period potentially reducing the overall premiums and to have the right level of cover in place. Holding one inside superannuation and one outside to make the best use of cash flow and tax. It’s also worth considering that after 5 years of being unable to work at all, there is the potential that other insurances could kick in, such as TPD, and this may reduce the need for holding a longer benefit period income protection policy. It is also true that income protection policies recommended by advisers have a significantly better claims success rate than those purchased online: 95% compared with 87% for online.
If Jess had been injured at work instead, she would find that her income protection payments would be reduced by the amount of any workers compensation payments that she was receiving in lieu of her salary. Similarly if she returned to work part-time, there would be a reduction in the amount of income protection she would receive based on the income she was earning.
With workers compensation, the state or territory where Jess worked would determine if she is or isn’t covered for both jobs and the difference between her total amount claimable under the income protection and the workers compensation payment she receives would be what she would receive from her income protection policy.
Let’s say she was covered for 75% of her total income ($2,360 per week) under her income protection policy, with a 14 day waiting period, and she was injured at her main job in Victoria. Her income protection would pay her $1,770 a week once the 14 day waiting period was over. Under the Victorian workers compensation scheme she would be entitled to 95% of her main income for the first 13 weeks: or $1,672 per week. In this case, her income protection policy would pay her $98 a week on top of the $1,672 she would get from the workers compensation payment. However, workers compensation amounts can decrease over time, whereas her income protection at 75% is likely to continue at the same amount for the length of time remains unable to work, assuming she would be back to full time work within a few years at worst.
It is also important to note that income protection these days can cover 75% of incomes up to around $300,000 per annum, whereas workers compensation in some states cuts out at 95% of around $146,000 per annum. So, a high-income earner would be significantly underpaid if they were to rely solely on workers compensation.
The information provided in this article is general in nature only and does not constitute personal financial advice.
