Paul Ryan of Patron Finance

This article is brought to you courtesy of Paul Ryan (Dip FS (FP) Dip FM) of PATRON Financial Services Pty Ltd. who will provide a series of helpful articles to assist you with your finances over the coming months.

Paul is a highly qualified and experienced Financial Advisor with over 30 years experience in Risk Insurance, Superannuation and Investment in the Financial Planning Industry. Paul provides advice in the areas of Wealth Creation Strategies, Personal Insurances, Debt minimisation strategies, Estate Planning strategies and Superannuation (both Personal and Corporate). Paul may be contacted on Mobile 0418 423 720 or email: pryan@patronfa.com.au

WHAT IS INCOME PROTECTION?

Most people have heard about it, many don't understand exactly how it works and surprisingly few have adequate cover in place, if any at all! It may sound over dramatic, but income protection insurance is one of the most misunderstood forms of insurance available. At the same time, it could be the wisest choice that a person can ever make!

So what is it?

Basically, it is a highly effective way of helping safeguard a person from probably the single greatest threat they may ever face; sickness or injury. If sickness or injury renders you unable to work, (and you satisfy the terms and conditions of your policy), then your income protection will go to work for you to pay a monthly income.

Quite simply, it will help put food on the table, petrol in the tank, stop the bank from foreclosing on your mortgage, keep the kids school fees paid and generally give you the means to maintain a reasonable standard of living if you are not able to get out to earn your income.

WHY DO I NEED IT?

When you consider how vulnerable a person's entire lifestyle is to a loss of income, it may be quite a risk to take by not having your income protected.

Consider how much you earn, multiply that by how many years you have until retirement, and then add a factor for inflation and pay increases. It doesn't take a mathematician to work out that some people may be risking literally hundreds of thousands, if not millions of dollars if they were to suffer a long term medical condition without some form of protection.

WHAT IF I JUST CONTINUE TAKING MY CHANCES?

Recent statistics show that on an average day in Australia:

• 214 people are diagnosed with cancer;1
• 41 people undergo coronary artery by-pass surgery;1 and
• 35 people between the age of 35 and 69 will survive a heart attack.1
• Furthermore, more than 60% of Australians will be disabled for more than one month during their working life;2 and
• more than 25% will be disabled for more than three months during their working life.2

BUT WON'T MY SICK LEAVE COVER IT?

Many people feel that income protection is only for the self-employed and that their sick leave will protect them if they are off work. The truth is that even the most generous employer may be unable to maintain a salary for someone who is not able to work for an extended period. Once sick leave expires, there is no obligation to support you and it is likely to be only what you have provided for yourself that will keep you going.

You may have personal savings, but for long term conditions, how long will that last? You may choose to rely on the Social Security system, but be prepared for a shock when you have to survive on what may amount to a fraction of your current income!

A reliable and practical answer is to create your own independent contingency plan through a personal income protection policy.

WHAT ABOUT WORKERS COMPENSATION?

Many people have a false sense of security believing that a magical lump sum will appear through Workers Compensation if they are substantially incapacitated.

In fact, 57% of disability claims are for sickness, and WorkCover does not cover non-work related sickness.3 Add to that the fact that over half of all serious injuries happen outside of work where WorkCover doesn't apply.4

Even if you are able to claim Workers Compensation, the restrictions on benefit payments are such that you may never be able to retain anything like your current standard of living.

HOW MUCH COVER DO I NEED?

Of course it would be ideal if you could insure your entire income and suffer no loss if you were off work indefinitely, but this would make the cost of cover prohibitive. Most income protection plans will allow you to cover seventy five percent (75%) of gross earned income. This is to maintain a standard of living comparable to that which you would have while working.

HOW DO I QUALIFY FOR A CLAIM?

To be eligible to claim a benefit is a vital aspect of any income protection policy. The major criteria will relate either to:

• loss of income; or
• performance of duties; or
• number of hours worked.

This loss will be based on the assessment of medical practitioners, specialists and accountants.

HOW MUCH WILL IT COST?

The investment you make in this form of insurance may pale into insignificance when you compare it to the potential benefits you could be entitled to.

In general, it will amount to a fraction of your income allocated to ensure you keep an income flowing in the worst of circumstances.

WHAT IF I'M NOT AT WORK OR ON HOLIDAYS?

One of the key benefits of a good income protection plan is that it offers cover regardless of where you are or when you become incapacitated. It gives you around the clock protection anywhere in the world.

WHAT HAPPENS IF I CHANGE JOBS, LEAVE WORK TO HAVE A BABY, OR GO ON A SABBATICAL?

While the general principle is to protect you while you are actively engaged in earning an income, there may be provisions which allow you to continue cover to some extent during periods away from work, or to suspend cover and recommence without further qualification after you return to work. The type of policy you take will specify how these conditions work.

I HAVE CRITICAL ILLNESS AND DEATH COVER, ISN'T THAT ENOUGH?

Income protection is complementary to other protection you may have, as it provides a broader spectrum of benefit payment situations when compared to other forms of personal insurance.

While term, trauma and total and permanent disability insurance pay lump sum benefits on defined events, income protection pays a monthly benefit on less specific criteria. In this way it forms the basis of lifestyle protection, upon which other lump sum cover can be added.

HOW DO I ARRANGE THE RIGHT PLAN?

Applying for income protection insurance is simple if you get the right advice. The first step is to talk to a financial adviser about how to assess your needs and what type of cover will suit you best. From there they can provide assistance in comparing the relative merits of various policies. Finally, they will help you implement your plan by guiding you through the application and assessment process and ensuring all relevant disclosures and evidence are supplied to your insurer.

Information in this article is for general information only and does not constitute financial or investment advice, taxation advice or recommendation, nor should it be relied on as such. You should seek your own professional advice tailored to your individual investment objectives, financial situation and particular needs.

Prior to making any decision you should read the Product Disclosure Statement which is available from your adviser or by contacting the relvant insurance company.

Sources:
1 Source: Australian Institute of Health and Welfare, Cancer in Australia 1998. 2 Source: Australian Institute of Health and Welfare, Heart, Stroke and Vascular diseases Australian facts 2001. 3 Source: Fabrizio & Gratton 1994 "Pricing Dread Disease Report"

Author of article: TOWER Australia Limited

This article is brought to you courtesy of Paul Ryan (Dip FS (FP) Dip FM) of PATRON Financial Services Pty Ltd. Paul is a highly qualified and experienced Financial Advisor with over 30 years experience in Risk Insurance, Superannuation and Investment in the Financial Planning Industry. This has involved the provision of advice to retail clients in the areas of Wealth Creation Strategies, Personal Insurances, Debt minimisation strategies, Estate Planning strategies and Superannuation (both Personal and Corporate).

Paul may be contacted on Mobile 0418 423 720 or email: pryan@patronfa.com.au