Is it just income protection that matters?

Many people seek products for income protection, but is it the only important product? How much do we understand about each of the risk management tools?

Personal insurance has been in Australia before the invention of the car (AMP was established in 1849). Yet, the general population understands car insurance much better than personal insurance.

There are four types of personal risk management tools:

  1. Death cover or life insurance (for more on life insurance see Goggling article here)
  2. Income protection or income replacement
  3. Total permanent disability
  4. Trauma cover or critical illness cover

Most people understand the basics about life insurance and income protection. However, many questions remain. Does life insurance cover suicide? Do you need to pay tax on benefits received from income protection? Total permanent disability and critical illness cover can be quiet confusing for the general public.

So, how does critical illness cover work?

The policy pays you a single lump sum when you meet a critical illness definition – such as Cancer. It is designed to cover the financial impact and costs of dealing with a critical illness.

Here is an example of types of critical illness covered by one insurance provider:


Here are the statistics for benefits paid in 2014 by the same insurance provider:

Total claims paid$100,156,123
Total number of claims525
Oldest claimant70
Youngest claimant12

According to the Australian Institute of Health and Welfare, 1 new cancer case is diagnosed every 4 minutes.

Cancer Council Australia reports a heavy burden of out-of-pocket costs associated with diagnosis, treatment and survival of cancer, even in the public system.

These costs include travel, hospital stays, specialist fees, parking, treatment prescriptions and over-the-counter medications. Carers and families bear cancer-related costs as much as those experiencing a diagnosis of cancer. The financial impacts of the disease also extend to reduced or lost employment, early retirement and reduced incomes.

An interesting article from the SMH reinforces this. “Cancer patients are experiencing significant out-of-pocket costs for their treatment at the same time as losing income at work”.

It also highlights the common misconception, that our free public health system will protect us when we get sick.

Whilst you cannot work because of illness or injury, income protection pays you a monthly benefit. It generally covers 75% of your pre-illness or pre-injury income. Income protection can therefore help you pay your bills and cover your ongoing living expenses. However, if your income protection benefits are subject to tax, the financial impact for you and your family will be detrimental.

Death cover, income protection, total permanent disability and critical illness cover is not about winning a lottery.

It is not an investment, but rather a safety net for unforeseeable disastrous events that can happen in life.

The aim is to dampen the financial impact for you and your family. Money buys you options and provides you with choices – nothing more.

Ensure that you understand your personal risk management tools:

  • How exactly does your income protection cover work?
  • How exactly does your critical illness cover work? For a lump sum payment to be made, specific and stringent definitions  of critical illness need to be satisfied. This prevents inappropriate payments made for benign cases with little financial impact.