By Allison Tait, ninemsn Finance
Nannas have always known it! "As long as you have your health," they say, the implication being that everything else will follow.
And it turns out that — as is often the case — Grandma is right.
Recent research by the National Centre for Social and Economic Modelling at the University of Canberra, published in the recent AMP.NATSEM report Healthy, Wealthy and Wise?, suggests that people of working age who are in poor health are more likely not to be working.
Therefore, they had lower incomes than people with good health.
And the difference can be significant. On average, people in poor heath earned less than half of what was earned by people in good health.
There's no doubt, then, that good health is a great asset — which means you need to look after it.
But, financially speaking, health is merely a tool for building your greatest asset.
"Your greatest asset is your ability to earn an income," says AMP financial planner Andrew Heaven of WealthPartners Financial Solutions, Sydney.
"Everything you do financially hinges on that. If you can't do that for any reason, what happens?"
The first question you need to ask yourself is, "Can I afford to get sick?" Chances are that if you have private health insurance, you'll be thinking, "I'm okay, the bills are covered".
But what about everything else? Can you pay the mortgage, meet the school fees, and put food on the table while you recuperate?
Fortunately, there's an insurance product to ensure you can.
"To me, income protection insurance [IPI] is a no-brainer," Heaven says.
"It's a tax-deductible expense that costs you less than the Medicare levy and will pay you 75 percent of your income up to the age of 65. It's all about maintaining the status quo."
What is IPI?
To understand what IPI is, we first need to discuss what it isn't. It won't protect you if you get fired or made redundant. If you are unable to do your usual occupation due to illness or accident, however, you're covered.
And, unlike workers' compensation, which may only last six months before reverting to disability benefits, IPI pays out 75 percent of your income up to the age of 65, if that's what you choose.
"With IPI you can choose your waiting period — how long will you need to wait before benefits begin — and your benefit period — how long your benefits will be paid," Heaven says. "Both of these affect the price of the policy."
The good news is that, according to Alan Caputo, general manager of iSelect life insurance (www.iselect.com.au/life), most products look "roughly the same", but, as with most insurance products, the devil is in the detail.
"You need a qualified financial planner to help you find the product that best suits you," he says. "It's very important to check the definitions in the policy.
For instance, there may be differences in the definitions of what constitutes you being unable to work.
One insurer may have an hours-based definition — if you can't complete a certain number of hours, you'll get your payment — while others may be duties-based, so if you can't carry out your duties, you'll be eligible."
It's worth noting as well that a policy may be an "agreed value" policy or an "indemnity value" policy.
"With agreed value, you supply the company with evidence of your income at the time you take out the policy and, if there's a claim, that's the amount they use to calculate your 75 percent," Heaven says.
"With indemnity value, your claim will be based on an average of the last three years' worth of income.
That's not a problem if you're salaried, but if you're in an industry where your income or circumstances are variable, you may wish to look at an agreed value contract."
How do I decide on a policy?
Andrew Heaven suggests the following steps for choosing a policy:
Identify your needs by running through "what if" scenarios. W hat will be the impact on your ongoing expenses (mortgage, education etc)? What will you need as a lump sum (through total and permanent disability or trauma cover) rather than recurring income (IPI)? Plan accordingly.
Look at waiting periods. How long can you afford to be out of the workforce before it has severe impacts on your income?
"A blue-collar worker who's self-employed may need a short waiting period," Heaven says.
"But if you have accrued leave, you might be able to afford a longer waiting period."
Consider benefit periods. "Someone in their twenties who's planning to work to 65 won't have a lot of assets and will need a benefit period right through to 65. Those with substantial assets who are in their early fifties may only need a five-year benefit period."
To help with the decision, a one-stop shop such as iSelect may be a great place to start. "We represent 14 major life insurers," Caputo says.
"We work on the fact that we want to find the best product for our client and we get paid by the insurer for doing it."
Their consultants will take details such as annual income, occupation, and ask a few questions about your requirements, then, after research, present you with two options.
"We give you the cheapest we can find — and we give you one we'd recommend," Caputo says.
Given that it's a relatively straightforward process, tax deductible, and provides ongoing income should life go pear-shaped, why aren't we all doing it?
"Underinsurance is a massive problem in Australia," Caputo says. "I believe it's got a lot to do with our 'she'll be right' attitude.
We always think the bad stuff will happen to someone else.
But one in three people gets diagnosed with cancer — why will it not be you?"
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