According to the Financial Services Council (FSC), around 3.4 million Australians lack adequate income protection (IP) coverage[1], a critical componence of life insurance.
Income protection replaces part of your income (typically up to 70%) if you’re unable to work due to illness or injury. It helps to cover living expenses like rent, mortgage, groceries and bills while you recover.
The benefit period is the maximum time your insurer will pay monthly benefits. But when you’re buying insurance, it can be hard to choose which benefit period is right for you.
It often comes down to balancing cost, coverage, and your personal circumstances.
Here are some tips to think it through…
- Know your financial obligations
– They may include living expenses, like your mortgage, school fees, and other long-term expenses. If these are substantial, a longer benefit period may offer better protection. - Review your savings and emergency funds
– A shorter benefit period may be enough if these funds provide a strong financial cushion. Otherwise, you may need longer coverage. - Consider your job and risk level
– If you have a high-risk occupation, you might benefit from longer coverage. Keep in mind some insurers may limit benefit periods for certain jobs. - Check your existing cover through Super
– If your superannuation fund already includes basic income protection, find out its benefit period and check what’s covered to avoid duplicating coverage. - Premium affordability
–In a nutshell, longer benefit periods = higher premiums.
So which benefit period should I choose?
Like any other type of insurance, income protection insurance is a trade-off between the cost of premiums and peace of mind.
A 2-year benefit period may have lower premiums but provides limited protection for long-term issues.
A 5-year benefit may provide more balanced coverage and cost but may still fall short for serious conditions.
A benefit period to age 65 or 70 offers the maximum protection available but also has the highest premiums.
IP insurance is worth considering, particularly if you’re self-employed, have dependents or large financial commitments (like a mortgage), or have limited savings to cover expenses if you had to stop work.
Many people underestimate just how much coverage they’ll need, so when you’re reviewing insurance, be sure you find coverage that’s the right fit for you. This includes having enough to support your family’s lifestyle, pay off debts, and cover any long-term expenses like education.
As always, talking things through with a financial adviser can help.
To book a one-off consultation, call me at Align Financial on (02) 9913 9995.
[1] Financial Services Council. (2022). Good advice would see a million more Australians with the life insurance they need [online]. Available at: https://fsc.org.au/news/media-release/good-advice-would-see-a-million-more-australians-with-the-life-insurance-they-need
