Understanding Income Protection: A Guide for High-Income Professionals
As a financial adviser, we are constantly guiding our high-income earning clients on the reasons why Income Protection might be right for them. This article aims to break down the complexities of Income Protection and the importance of gaining comprehensive financial advice.
What is Income Protection?
Income protection, also known as salary continuance or income replacement, is an insurance policy that pays benefits if you’re unable to work due to illness or injury. It’s designed to replace up to 70% of your gross income, helping you maintain your lifestyle and meet your financial obligations.
In addition to the 70% coverage of your gross income you can also opt to have your superannuation guarantee covered as part of the policy.
Who Needs Income Protection?
While income protection is beneficial for anyone who relies on their income, it’s particularly crucial for high-income professionals. These individuals often have significant financial commitments, such as mortgages, school fees, and lifestyle expenses, that don’t stop when their income does.
As a financial adviser, we see first-hand how quickly your financial position can change due to an unexpected illness or injury, often wiping out years of hard work or worse.. financial hardship.
Why is Income Protection Important?
While income protection is beneficial for anyone who relies on their income, it’s particularly crucial for high-income professionals. These individuals often have significant financial commitments, such as mortgages, school fees, and lifestyle expenses, that don’t stop when their income does.
As a financial adviser, we see first-hand how quickly your financial position can change due to an unexpected illness or injury, often wiping out years of hard work or worse… financial hardship.
How are Income Premiums Taxed?
In Australia, income protection premiums are generally tax-deductible. This means that the cost of your premiums can be offset against your taxable income, reducing your overall tax liability. However, any benefits received from the policy are considered taxable income.
Premiums can be paid personally or via superannuation. Although the policies can be quite different and will ultimately have different tax benefits.
For example, someone earning $200,000 pa will claim the income protection policy personally on the 45% tax bracket, whereas inside superannuation this will only be 15%.
How Much Income Protection Do I Need?
Determining the right level of coverage depends on your financial obligations and lifestyle expenses. As a rule of thumb, aim for a policy that covers up to 70% of your gross income. However, it’s important to review your coverage regularly, especially if your income or financial commitments change.
When it comes to higher levels of coverage this can vary due to some insurers capping their income protection at $15,000 – $30,000 per month of income protection coverage.
When Does Income Protection Get Paid?
Income protection policies typically have a waiting period before benefits are paid. This period can range from 14 days to two years (generally 30, 60 or 90 days), depending on your policy. Once the waiting period has passed, benefits are paid for the duration of your incapacity, up to the benefit period specified in your policy which are commonly a period of 2 years, 5 years or payable until age 65.
Conclusion
Income protection is a vital part of financial planning for high-income professionals. It provides a financial safety net, ensuring that you can maintain your lifestyle and meet your financial obligations, even if you’re unable to work. If you want to learn more about Personal Insurances you can read our education posts.
Remember, this article provides general information. For advice tailored to your specific circumstances, consult with a professional financial adviser. Stay informed, stay protected, and secure your financial future with income protection.
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Please note that this article is intended to provide general information only and does not take into account your individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and seek professional advice before making any investment decision.
This information is true and correct as of 31 July 2024, prior to making any changes we recommend you read Government resources and seek Financial Advice prior to making any changes.