Hi Nicole, I understand the benefits of income protection insurance and have a policy outside of my superannuation (with Westpac) as the cover is more extensive and the premiums are tax deductible. As of last year, however, the year I turned 50, the cost is increasing substantially; 10 per cent last year and 8 per cent this year, resulting in a premium costing $4000. Obviously as one gets older the risk of making a claim increases, however, at some point, the cost will become unsustainable, particularly as I am looking at another 10 years of employment. Is the coverage and tax benefit worth the cost? Carmen, Frenchs Forest
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Carmen, you ask interesting questions. Income protection is expensive because it replaces up to 75 per cent of your income, usually to age 65, if you're unable to work through accident or illness. Just as well it's tax deductible!
A few years ago there was also what my own insurer described as "industry-wide repricing", which RiceWarner Actuaries tells me was due to a $1.5 billion collective one-year loss across the industry. Even so-called 'level' premiums, the idea of which is to pay comparatively more at the outset so the cost doesn't go up with age, were hugely (unjustly) hiked.
So you've probably made a smart move going for "stepped" premiums and taking advantage of cheaper premiums earlier in life. Which brings us to now.
Though you are getting older each year - yes, increasing your insurer's risk you'll claim - the time for which the policy would pay out is also reducing. Even so, just one year of a payout probably equates to more than 10 years of premiums (is it $40,000 or more?).
To truly consider the cost versus risk equation, you also need to look at how much debt you hold and any dependents. How much do these cost each month? There may come a point when this reduces enough that you are comfortable dropping cover.
But your smartest moves today are probably:
1. Check your cover would pay out if you're unable to perform the duties of your job - "own occupation" (rather than "any occupation") policies promise this. If you earn less than when you originally took out the policy, also check what it would currently pay ("agreed value" policies pay based on what you signed up for).
2. Take steps to reduce your premium. The best way is to extend the waiting time for payments, say from one to three months (I would caution against reducing the sum insured - sod's law could get you!). But don't even think about it unless/until you have sufficient money stashed to cover you for this potential period without income. Your vital Holy Sh*t fund.
Nicole Pedersen-McKinnon is a money educator and consumer advocate: themoneymentorway.com. You can write to her for help solving your money problem, or with a consumer question, at nicolehelps@fairfaxmedia.com.au.
