Income Protection: Your Most Undervalued Wealth Strategy
When people think about building wealth, they tend to think about investments.
Property.
Shares.
Superannuation.
Business ownership.
But there is another asset sitting behind almost every successful wealth strategy:
your income.
For many professionals and business owners, their future earning capacity may be worth considerably more than their current investment portfolio.
Yet while people insure their homes, cars and businesses, their ability to generate income can receive far less attention.
That's why income protection can be one of the most undervalued components of a long-term wealth strategy.
Your Income Funds Your Wealth
Imagine a professional earning $250,000 a year.
Their income doesn't simply fund today's lifestyle.
It might also fund:
mortgage repayments
superannuation contributions
investment contributions
school fees
holidays
insurance premiums
debt reduction
future retirement savings.
If that person becomes seriously ill and can't work for an extended period, the financial problem isn't limited to replacing today's salary.
Their entire future wealth-building strategy can be interrupted.
Losing Income Has Two Costs
The first cost is obvious:
the income you don't receive.
The second is less obvious:
the wealth that income would have created.
Suppose you normally invest $50,000 each year.
If illness prevents you from investing for several years, you don't simply miss those contributions.
You also miss the potential future investment returns those contributions could have generated.
If existing investments then need to be sold to fund living expenses, the effect can become even greater.
Instead of adding capital to your wealth strategy, you're withdrawing it.
That's why protecting income can also mean protecting future wealth.
How Does Income Protection Work?
Income protection insurance is designed to replace part of your income if illness or injury prevents you from working, subject to the policy's terms.
Policies can differ considerably.
Important features can include:
the insured benefit
waiting period
benefit period
definition of disability
income definition
exclusions
offsets
premium structure.
Don't judge an income protection policy only by its monthly benefit.
Understanding when it pays and for how long is equally important.
How Long Could You Survive Without Your Salary?
This is a useful exercise for any household.
Imagine your employment income stopped tomorrow.
How long could you continue paying:
your mortgage
groceries
utilities
school fees
insurance
investment commitments
general living expenses?
One month?
Three months?
A year?
Your answer helps identify how dependent your financial position is on continued employment income.
Choosing a Waiting Period
The waiting period is generally the period you need to satisfy the policy's disability requirements before benefits become payable.
The right waiting period may depend on your existing resources.
Someone with six months of cash reserves and substantial leave entitlements may have different needs from someone with limited accessible savings.
A longer waiting period can potentially reduce premiums, but it also means you need enough resources to fund yourself until benefits become payable.
This is why income protection should be coordinated with your emergency fund.
The Benefit Period Can Matter Even More
Many households worry about being unable to work for a few months.
But the more serious financial risk may be being unable to work for several years.
If you're off work for three months, savings may help.
If you're unable to return for years, the impact on your mortgage, investments and retirement savings can be substantially greater.
When reviewing income protection, therefore, understand the policy's benefit period rather than focusing solely on the premium.
Income Protection for High-Income Earners
For high-income professionals, income protection deserves particular attention because remuneration can be complex.
Your income may include salary, bonuses, commissions or business income.
Policies also place limits on how benefits are calculated and paid.
That means it is important to understand what the insurer considers income and how your policy would operate if you actually made a claim.
Isn't My Emergency Fund Enough?
Perhaps — for short-term events.
A substantial emergency fund can be an excellent financial buffer.
But consider what happens if you're unable to work for two, three or five years.
Self-insuring a long-term loss of income requires considerably more capital.
Insurance can allow you to transfer some of that potentially significant risk to an insurer rather than maintaining enough cash to cover every possible scenario yourself.
Income Protection and Wealth Planning in Perth
For professionals and business owners in Subiaco and across Perth, income protection shouldn't necessarily be viewed simply as another household expense.
Your income is the engine that funds your investments, debt repayments, superannuation and lifestyle.
Protecting that engine can therefore form part of protecting the wealth strategy itself.
We often ask:
"How should I invest my income?"
It can be equally valuable to ask:
"What happens to my financial plan if that income disappears?"
This article contains general information only and does not take into account your objectives, financial situation or needs. Policy terms, exclusions, waiting periods and benefit periods vary. Consider the relevant Product Disclosure Statement and professional advice before making insurance decisions.