shutterstock_potholesWould you drive your car without insuring it? No way! It would set me back both financially and lifestyle-wise if I had an accident and had to replace my own (and perhaps somebody else’s) car.

I mean, I could get by without a car… I could ride one of those trendy vintage cruisers (perhaps not through a Melbourne winter). I could catch public transport. I could even borrow my Dad’s not-so-trendy Valiant now and then.

While I could get away without a car I would prefer not to.

This is why I can never understand why people insure their cars but don’t insure their incomes – quite likely their greatest asset.

If you were paid the average annual full-time wage of $78,000, you would earn around $9,500,000 over a 40-year working life*. You would use this money for daily living, for holidays, to accumulate assets like a house and a better car and to save for your retirement. Being injured or ill, for only a short period, could severely affect or even cancel some of these plans.

What would you do?

Your income may be replaced from a number of sources:

  • If it is a work-related injury or illness, workers compensation may pay your basic wage and medical expenses until you return to work.
  • You may have accumulated sick leave if you’ve been with the same employer for some years.
  • You may have savings you can access.
  • Your spouse could return to work (assuming they don’t need to care for you).
  • You could move back home with your parents.

But this may only meet nominal living expenses – you might have to continue servicing loans and pay medical expenses, some of which may not be covered by Medicare or your private health fund. How will you do that?

Insuring the risk

Income protection insurance usually pays up to 75% of your normal pay whilst you’re off work. You can tailor a policy to suit your situation. For instance,

  • How long must you be off work before payments start?
  • How long will you receive the income?

Most policies will require you to be unable to do your own job although some include rehabilitation benefits as you gradually get back into the workforce.

While premiums are usually tax-deductible when paid by you, there is also the flexibility to hold this cover through your superannuation to minimise the impact on your day-to-day cash flow.

Sure, you can “get away” without insuring your income but do you really want to?

*Assuming an annual wage increase of 5%.

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