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Unexpected time off work can quickly spell financial stress. If you suddenly stopped earning a living, what would your situation look like?

😬 If your answer is something along the lines of, “I’d definitely have trouble paying the bills," you’re not alone.

📈 The latest figures from the ABS reveal household savings are declining, while interest rates are rising along with the cost of fuel, food and other essentials.

🙀 Basically, the more the cost of living increases and the less you have in savings, the more daunting the thought of not earning money can be. This is where income protection can help.

What income protection covers

Whether you’re self-employed or have an employer, income protection is a little-talked-about but important part of managing your finances.

• Income protection is a type of life insurance that can help cover your financial commitments if you’re too ill or injured to work.

• It typically pays about 70% of your income as monthly payments while you’re off work.

• So if, for example, you’re injured in a car accident and can’t work, you’ll still have money coming into your bank account while you recover.

🌈 It can help you continue to cover your mortgage or rent, pay your credit card bills and other debts, buy groceries and generally keep up your usual standard of living.

Things to be aware of...

The biggest thing to keep in mind with income protection is that not all policies are created equal.

👌 A lot of super funds offer income protection for members, but this tends to be general cover that might not be right for your needs. It’s a good idea to check whether the amount of coverage offered by your super fund is enough for you.

📊 Some insurers will pay you 70% of your income for the duration of your time off, while others will pay a lower percentage.

⏳ Insurers will generally specify the maximum length of time they’ll pay you for, which is called the ‘benefit period’. Depending on the insurer, this could be one, two or five years, or up to the age of 65.

❌ Some income protection policies don't cover redundancy – only illnesses and injuries/accidents.

The pros

Essentially, income protection can be a financial safety net if you’re ever too ill or injured to work. It’s a bit like having an income, and can take some stress off you while you recuperate.

• If you're the main breadwinner in your family, have kids, a mortgage or other big financial commitments, it can be reassuring to know you’ll still be able to pay the bills if you can’t work.

• Income protection can be especially useful if you don’t have the benefit of annual leave or sick leave, for example if you’re self-employed.

• The premiums you pay for income protection are generally tax-deductible.

✅ Some income protection policies cover additional expenses like rehabilitation.

The cons

Like any type of insurance, there are some potential drawbacks to income protection.

• It’s another cost you have to think about, which might not be manageable depending on your financial situation.

• If you have a pre-existing condition, you might not qualify to be covered for claims related to that condition. For example, if you have diabetes, your insurer may not cover you if you need to take time off work for an illness caused by or related to diabetes.

• There’s usually a waiting period before you can make a claim. According to Money Smart, this can vary from between 14 days and two years, so it’s a good idea to check the fine print before signing up for a policy.

The bottom line

Income protection is one of those things you might not think about until you actually need it – but by then, it could be too late to get cover.

🔍There are pros and cons to any type of insurance, but it’s always worth weighing up whether income protection could be helpful for you.

💰 It can cost as little as a few dollars a week, and you can generally claim your premium back as a tax deduction.

🧮 Even if you’re on the fence, check out the options available and crunch the numbers. It could save you in the long run.

The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.