Gettler: Why you need to insure your income

Let's say you are in your late 40s or early 50s and about to hit your peak earning years.

A good part of your income is going into your superannuation and you are already talking about spending your retirement travelling, or even driving around Australia.

What if your reseller business falls over or goes bankrupt? Or what if you get sick? Keep in mind that based on the existing statistics, one in three men and one in four women in Australia will develop cancer by the age of 75.

Reinsurer General Re estimates that 40 percent of Australians will suffer a traumatic event before the age of 65.

These events can include cancer, strokes, heart attacks and bypass operations.

That's just health. What about calamities hitting the business? How would you cope with a data failure? Or having staff in accidents? Or theft of stock?

There is no guarantee any business can avoid every problem. But insurance companies and even superannuation funds have an array of strategies that can help supplement income, pay health care costs and help build cash when hard times hit.

While most people understand the importance of insuring their home, death, illness or injury are more likely to happen than an event that threatens the home. So are catastrophic events hitting businesses.

Many super funds already offer forms of insurance designed to protect income. Because of the size of super funds, this is usually well priced and easy to get. Super funds generally offer three forms of insurance.

Life insurance which provides a lump sum in death or being diagnosed with a terminal illness; total and permanent disablement insurance which provides a payment if you are sick or injured to the extent that you are not able to work again and income protection insurance which provides regular payments if you are unable to work for an extended time due to injury or illness.

Generally, people receive insurance when they join a default super fund, although they can opt out. But be warned. If you decide later that you want insurance, you have to apply and provide records showing your health. Furthermore, the premiums are likely to be higher.

Generally, insurance premiums are deducted automatically from the super account and because the cost does not come out of your pay packet, it leaves you with more disposable income. In terms of income protection, super-based insurance is also cost-effective because you're paying for it with money that's been taxed at the 15 percent super contributions rate, rather than at a personal tax rate that could be as high as 45 percent.

Those are the advantages of doing it through your super. But there are distinct disadvantages. Super-based insurance is more complex. Further, insurance premiums will erode retirement savings. Another problem is that policies structured for a group won't necessarily fit an individual's circumstances.

To cover critical areas, such as plant, equipment, vehicles, travel and personal indemnity, you turn to insurance companies.

An insurance broker is always good to have on hand. Financial advisers are worthwhile too as they, like insurance brokers, can help you review existing insurance arrangements. It is worth shopping around because prices can vary greatly. Premiums depend on age (they might increase as you get older), gender, health and pre-existing conditions, occupation, whether or not you smoke and the time you choose to wait before receiving payment.

The length of time you receive payments depends on the contract terms, and varies according to the amount you wish to pay for.

The amount of income protection insurance depends on the size of the salary you want to insure. Income protection can cost around one week's salary, keeping in mind that premiums are generally tax deductible. Generally, income protection insurance provides cover for around 75 percent of your salary in the event of illness or injury. This means people will still need to consider other expenses, such as mortgages, debts and providing
for dependants.

On the question of whether you are over- or under-insured, you need to know what level of cover is appropriate for you. Everyone's insurance needs are different. Some basic questions need to be asked. Should the worst happen, what expense and debts would need to be met? And what other sources of income are there, for example, through savings and investment, or superannuation?

When taking out a policy, there are key issues to consider. What's covered? What's not covered? How much will be paid out when making the claim? What will the premiums cost now - and later? Are the premiums index-linked, thus ensuring the cover keeps up with inflation? Are there offset clauses that allow the insurer to reduce payouts if you have other income? What is the waiting period before the payment is received? It is also worth considering a non-cancellable policy as insurance companies can reassess your health on each renewal.

Insurance can be crucial. But anyone taking it out needs to check carefully the terms and conditions. Keep in mind, insurers are there to make money.