Paul Clitheroe
Paul Clitheroe

The laid-back Aussie doesn't need to leave money to chance

I RECKON Australians are generally a pretty optimistic bunch, however there's a big difference though between having a relaxed outlook on life and leaving the important things to chance.

It turns out plenty of us take the latter approach, with a report by Suncorp showing  about 12.4 million Australian  workers don't have income protection insurance. Yet our ability to earn a regular livelihood is arguably our most valuable asset.

As a guide, government figures show full-time adult average weekly earnings are currently about $1,517 or $79,000 annually. At that rate, you could pocket total earnings of around $4 million over a working life. That's serious money - and a convincing argument to take out income insurance.

The idea behind income protection insurance is very simple. It pays a regular stream of cash, usually equal to 75-80% of your normal wage if you can't work due to illness or injury. That's money to pay the rent or mortgage, buy groceries, pay the children's education costs - and manage all the other expenses we face in our busy lives.

What's worrying is that many of us don't have a backup plan if we weren't able to earn an income. According to Suncorp, one in five workers would rely on government hand outs. One in four don't have any sort of plan at all.

As we reach the end of the holiday season and the kids head off to school, it's worth reassessing how well you would manage if something happened to your ability to earn an income. Sure, there are plenty of statistics around showing the odds of contracting a serious illness, but injuries can happen from something as simple as getting dumped in the surf at the local beach or being involved in a car accident.

In life, as in investing, it's not a matter of avoiding risk altogether. The key is to manage the risks we face with appropriate insurance cover.

You may be able to arrange income protection cover through your super fund, or you can choose to buy it independently through a separate insurance company. The premiums vary widely depending on your age, any pre-existing health conditions you may have, whether or not you smoke and your occupation.

A lot of insurers offer online quotes for income cover so it's easy to shop around. Also, if you organise cover outside of super, the premiums can normally be claimed as a tax deduction, which effectively makes it more affordable.

As with any type of insurance, be sure you know exactly what is covered and what isn't before you sign up - this is vital. In particular, take note of the waiting period that applies before you start receiving payments - it can range from 30-90 days, as well as how long payments will be made for (the 'benefit period'). This can span from about two years all the way through to the day you retire.

For more on income protection insurance and how it works, talk to your financial adviser or take a look at my book Making Money.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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