Insurance

It’s easy to take a steady income stream but you could be in all sorts of trouble if it was to dry up suddenly. That’s where these two types can step in and make all the difference.

Income protection

What is it?

Also called salary continuance, this replaces up to 75 per cent of your salary – paid monthly – if you’re unable to work due to illness or an accident. Some policies also continue to make super contributions on your behalf.

What is it meant for?

It should cover all your monthly expenses while you’re unable to work.

How can you save on premiums?

By opting for a longer waiting period. A policy with a 30-day waiting period is half the price of a 14-day wait policy. If you have enough savings and sick leave, choosing a 90-day waiting period is about 25 per cent cheaper than 30 days, says Mark Kachor of DEXX&R. If you can live on less than the traditional payout of 75 per cent of salary, he says that taking a lower replacement ratio makes sense and will cut the cost of the premium. Most products offer this option.

Is the benefit taxable?

Yes, at your marginal rate.

What do you need to know?

There are two types of cover. Agreed value means the amount is agreed at the time you take out the policy, whereas indemnity cover is based on your earnings at the time of the claim. The former is more expensive, Kachor says, but better suited to those with fluctuating incomes. Also, if your cover is via super, check whether it lasts more than two years. If not, top it up outside super. Lastly, make sure there’s no “offset” clause that cancels cover if you also receive a TPD payout.

Trauma cover

What is it?

A lump sum benefit if you are diagnosed with a specific major illness or injury such as cancer or a stroke. Inevitably, not all your health costs will be covered by private health insurance, Mark Kachor says, and you may be required to have some time off work to recuperate. Or you may be unable to return to work and need to find replacement income.

What is it meant for?

To pay off debts and cover the cost of rehabilitation.

How can you save on premiums?

Cover against trauma is expensive and it’s hard to find savings.

Is it taxable?

No.

What do you need to know?

This cover is often at the bottom of the priority list because it is expensive. Also, working out how much you’ll need is akin to taking a stab in the dark, says Louise Biti of Strategy Steps. Many advisers suggest you self-insure with savings and the safety net of a redraw mortgage (but check if your lender will allow you to redraw extra repayments if you are unemployed) as long as you have income protection. Kachor says most cover falls between $250,000 and $400,000.

Follow us on Facebook and Twitter

Follow Smart Investor on Twitter: @smartinvestr (this is the correct spelling for us on Twitter) and on Facebook at facebook.com/afrsmartinvestor