Being unable to work due to sickness or injury is a very real and frightening circumstance. Six in ten Australians will be disabled for more than one month during their working life, one in four will be disabled for more than three months*. Despite not being able to earn an income, your financial commitments will continue despite the fact you are not earning an income. Risk needs to be managed to ensure that you can continue to support yourself and your family during the time that you are incapacitated. Personal risk insurance is one way of managing this risk – income protection provides a monthly income stream to compensate you for your lost income when you are unable to work due to sickness or injury.
Income protection premiums are generally tax deductible as the premiums represent the cost of protecting your income stream. The benefit of the tax deduction is tied directly to your taxable income and can represent a substantial reduction in premium in your after tax cost.
As you approach the end of the financial year, reviewing your current income protection needs may have an added tax incentive. After discussions with your planner, you may be able to pay for the annual cost of cover in this tax year and secure a full tax deduction for the cost of cover.
Income protection premiums may be funded using your accumulated superannuation balance – you do not have to fund the cost of premiums from your earnings or savings.
Income protection insurance inside superannuation offers a cash flow advantage by using the accumulated balance in your superannuation account. This strategy does not require you to pay any additional premium from your earnings or savings. Your financial planner will arrange the payment of the income protection premiums from any superannuation account whether directly in your current fund, or via a rollover to the income protection policy.
It is important to note that income protection inside superannuation is not always appropriate and needs careful consideration from your planner. Using your superannuation account balance to fund an income protection insurance premium will erode your retirement savings – the impact of such needs to be discussed to ensure you can still meet your retirement goals.
Your financial planner will talk to you about the limitations that exist when funding an income protection premium through superannuation. There may be some benefits that are important to you that cannot be offered through superannuation. In this case, you may be able to split the cost of your income protection premium using superannuation and after tax earnings. In this scenario, your superannuation account can fund up to 95 per cent of the total premium, ensuring that there are still significant cash flow benefits in this model.
Few consumers have the ability to navigatethrough the opaque and complex taxation and regulatoryrulesrelating to income protection. However, it is vitally important for all income earners to consider what happens if they are incapacitated, and how to manage this risk. A discussion with your financial planner will help you to formulate a strategy that is both appropriate and cost effective.
*Fabrizio, E (2007) Australia & NZ Disability Income Experience
www.actuaries.org/IAAHS/Colloquia/Cape_Town/Walker_-_Income_protection.pdf AIHW (2008) Cancer in Australia: an overview 2008, Cancer series no. 46, Cat. no. CAN 42, Canberra