Troy Burns
Updated Dec 19, 2022
Mate Checked
For as long as I can remember, income protection insurance has been a great way for financial planners to generate revenue for their business. To give you an idea of just how lucrative selling an income protection insurance policy to a client is, a financial planner will usually receive 110% of the first year’s premiums as a commission. It’s no wonder that many Australian’s have this insurance in place but just how good is the insurance policy when you need it?
It’s important to acknowledge that everyone’s scenario is going to be different and will play a large part in assessing if income protection insurance is right for you or not. Believe it or not, there are times when having the policy does make sense, but this is increasingly rare, particularly for someone like myself.
Whilst we are on the topic, I am a 33-year-old male, happily married, I don’t have kids. We are fortunate to have a household with two above-average incomes, we live in a comfortable house with a relatively small mortgage and a reasonable super fund balance due to some early prioritisation of retirement saving. I was fortunate to have some decent guidance from a young age about the importance of saving for the future and managed to follow that advice to my benefit.
A person’s assets compared to their liabilities play a big part in determining if income protection insurance stacks up or not. What I mean by this is that if tomorrow, I lose the ability to earn an income I can sell everything I own (including my super), afford to keep the house I live in and have enough money to live with 10+ years worth of living expenses. I’ll acknowledge that I am fortunately in a reasonable financial position for my age, but think about it this way – the insurance company is effectively betting on me losing my ability to work and earn an income. Yes, they are betting against me!
My job requires me to sit in front of a screen all day, so the primary tool of my trade is brainpower. I spend most of my waking hours in a low-risk environment compared to other workplaces, and it would be considered highly unlikely for a person to die in the office. Even if I have an accident going to or from work, likely, I will still be able to speak, type on a keyboard and work in some capacity.
Making matters worse is that because I am fortunate to be earning a decent wage and accustomed to some of life’s finer things, I am targetted by insurance companies and financial advisors who play on these emotions. They will try to scare you into thinking you might lose everything you have worked hard for and for the cost of the insurance policy it’s a worthwhile expense with all this at risk supposedly.
A quick search in Google can show you just how easy it is to obtain an income protection insurance quote. Filling in the online form, which of course is a precursor to an additional application, I was able to get an idea of what a policy might cost with just 5 questions or less:
With so little input and no more than 60-seconds, I was offered no less than 13 ‘comprehensive’ insurance policy quotes ranging from $113 to $185 per month. I can’t believe that 5 simple questions resulted in an income protection insurance quotation, and I am now expected to hit the ‘go button’ and pay between $1350 and $2220 per year forever. That’s nearly $100,000 between the ages of 21 and retirement age.
Of the policy quotes which I received, many included a large number of complicated exclusions and reasons for the insurer not to pay out when the time comes. Another curveball is that some policies will only pay a benefit until the insurance company deems you can return to work. It doesn’t sound like ‘life’ insurance to me at all.
The basic idea of income protection insurance is if the total of your liabilities equals more than the sum of your assets, then you need some sort of guarantee that you can live without any ones help.
If you are in a net favourable position, that is you have more assets than you do liabilities. I believe there is a much better way of looking after yourself than paying for an income protection insurance policy – invest in a fund instead. I’ve done the maths below on the outcome of investing a similar amount to what an insurance policy costs in a growth fund. If the fund you invested in generated an average 5% per annum return from age 21 to age 65, over that period we’re talking about nearly $400,000 that you could have put away, in the event you were unable to earn an income.
Here’s where the magic starts, now the above 5% per annum return might sound measly by historical standards, but it’s also somewhat achievable in a worst-case scenario. If we were to invest $185/month and receive an above-average return of 10% from age 21 to age 65, this achieves almost $2 million. Double-digit returns and the power of compounding certainly is a remarkable thing, so I would encourage you to think outside the box next time a financial advisor is trying to sell you an income protection insurance policy.
