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How does life insurance and income protection work?


Whatever your thoughts on your current job, it's unlikely you can survive without it. But what happens if you become unable to work? In the worst-case scenario, what if you die and your family is left to maintain a comfortable lifestyle without your financial support?

Essentially, this is what life insurance and income protection boil down to. And yet around half of Australians aren't protected in this way, according to CommInsure, perhaps believing that they may not need it. When we look a little deeper into what life insurance and income protection offer, we see why this is a rather worrying statistic.

Here's a quick rundown on how the coverage works.

Understanding personal insurance

No one knows what could happen to them, though in terms of personal insurances, there are four overarching scenarios in which you can make a claim:

  • Death
  • Total and permanent disabilities (TPD)
  • Medical trauma (heart attack, stroke, cancer)
  • Short-term disabilities (broken bones or illness that keeps you off work)

You likely have a lot of questions about life insurance, which is good. It's important to understand which levels of insurance are most pressing for you and your situation. Without this understanding, you may be paying for cover you don't need, or underinsured and unable to make a claim when you think you should.

CommInsure's research shows that Australians are currently underinsured by $3.1 trillion. Around 70 per cent of us know someone with trauma, though only 8 per cent are covered for it themselves.

Whatever your age or situation, your best bet is to speak to a financial planner and help them create a policy that suits you. For example: if you're single, death cover and estate planning may not be a priority, though income protection could be, which is something your planner can help you identify.

For a more visual understanding of how this works, click our video below.

How do I get paid?

Should you or a loved one need to make a claim, it's possible to receive that money in a lump sum for death, TPDs or traumas. You can use this money to repay debt, make an invest and strengthen your future financial position, or immediately look after your family.

Income protection, meanwhile, takes the form of monthly payments for any medical reason that leads to you being off work. In terms of when you get paid, there are lots of variables, including your savings, sick day entitlement, any basic income protection in your super, and more.

You can also mix lump-sum cover and income protection in your policy, so you may have the former for trauma and TPDs while using income protection for minor illnesses and injuries.

Around 70 per cent of us know someone with trauma, though only 8 per cent are covered for it themselves.

How can I pay for personal insurance?

You can simply pay for your life insurance as a deduction from your wage or you may decide to pay for it from your super policy. With the latter option, it's important to realise that doing so can negatively effect your end retirement balance, so there needs to be some balance.

Your cover package may also be tax deductible, particularly with income protection, so that's something to discuss with your financial planner, too.

A helping hand

No one said life insurance was easy, though it might be one of the most important things you get sorted this year. Whether it's starting with your first policy or renewing your life insurance cover, speak with your financial planner for a helping hand.

By taking into consideration your debts, dependents, income and budget, the team at Eclipse can help you understand your options as a starting point. From there, we'll structure a package of insurance with an appropriate provider.

To find out more, give us a call on (+61) 7 4946 7359 or contact us online.

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