Many more Australians take out comprehensive car insurance than they take out income protection insurance, despite the fact that our incomes are far more valuable to us. According to Map My Plan’s 2015 Financial Fitness report, more than three quarters of us have comprehensive car insurance but less than a quarter of Australian workers have income protection insurance.
It’s likely that a large chunk of the approximately 75 per cent of workers that don’t have income protection insurance are young people in their 20s. As a young person, you might wonder why you’d even need to insure your income. You’re probably fit and healthy with few debts and no dependants. You also might feel that the small amount you earn at this early stage of your career isn’t even worth protecting.
But misfortune can strike any of us at any time and even the small costs of daily life can become big money drains while you’re unable to work and without an income. Granted, while you’re young there is less chance your health will get in the way of your salary, but on the flip side this means you pay lower income protection insurance premiums. It’s the opposite case with car insurance – as a young person you’re riskier to insure so you pay higher premiums.
But your income should be more valuable to you than a car which, if you’re a young graduate, probably isn’t worth much. So if you see fit to fork out on car insurance (beyond CTP), perhaps you might also be willing to spend a bit more by taking out income protection insurance.
Benefits of income protection insurance for young people
You don’t want to have to rely on the charity of others
When you can’t work for an extended period of time, you’ll struggle to pay for things like rent, bills and food. You might then feel as if you’ve got no other option than to seek out the charity of your family and friends. Although many of these people might be happy to let you stay for free – for a while – you don’t want to feel like a burden to them. A monthly benefit that equals 75% of your monthly income should be enough to cover your daily costs, so you won’t have to rely on others when you can’t work for a period of time.
While you’re young and healthy, you’ll have much lower life insurance premiums than when you’re a less-healthy older person. According to Canstar’s comparison tables, an 18-27 year-old male in an office-based job seeking $2,000 per month of coverage (not much but it could keep you afloat) can take out a policy for as little as $35 a month. That’s probably less than you spend on coffee or alcohol. Comparatively, a 58-62 year-old male requiring $5,500 per month of coverage would have to pay at least $415 a month.
You wouldn’t want to eat into your savings and investments
While the money you have aside in savings and investments can keep you afloat in dire straits such as when you’re without any income for a period of time, it is better not to touch these funds. By draining this money away with daily costs, you’re losing the benefits of compounding interest and growth returns.
Also, your savings and investments are better used for attaining long-term goals, not short-term requirements. Eating into this hard earned money will push you further away from these goals.
It can be tax deductible
According to the ATO, you can claim a tax deduction for income protection premiums. You can’t however claim a deduction for a premium on a policy that compensates you for physical injury or where the policy is taken out through your superannuation.
In the event you do receive payments from an insurance policy, these payments should be declared on your tax return.
Income protection insurance through super?
Many people have a form of income protection insurance through their superannuation fund. Usually this is by default, and a super fund might start charging you monthly insurance premiums from when you first open the fund. There are probably a large number of young people out there who aren’t even aware they’re being charged insurance premiums since it’s coming out of their superannuation balances – something they don’t give much thought to.
Check with your super fund to see if your income protection insurance is suitable for you. If not, compare income protection insurance for 18-27 year-olds here