The value of income protection is something that has gained a more widespread understanding and acceptance in recent years and many more are becoming wise to the need for a contingency plan which will pay a regular monthly income if sickness or injury prevents them from working.

 The 75% of income limit

The general rule of thumb with income protection is that most insurers will only allow you to implement cover of up to 75% of your gross income.

This limitation on how much of your income you can insure is generally driven by the need for life insurers to keep cover affordable by discouraging illegitimate claims. If they allowed cover to be 100% of income then the incentive to make a claim (and then to stay on claim for longer) would be so great that it would severely impact the pricing of cover.

While the reasoning behind this limitation is understandable, it still means a sizeable drop in income that many may not be satisfied with. 75% of your income might pay for the basics and keep you self-sufficient, but sacrifices and lifestyle adjustments would need to be made.

So what can you do if you want a better solution?

One way you could approach this challenge is to package trauma cover with your income protection. While trauma cover only covers specific traumatic events, it can still be effectively used as a way of achieving a 100% solution.

Let’s examine this concept a little deeper.

The first point to note is that the vast majority of claims on income protection are for illnesses rather than accidents. Under the broad heading of ‘illnesses’ there are a wide variety of possibilities. If you have an illness that only puts you out of action for a few weeks or months, then 75% of income may be sufficient to get you by until you return to work.

But what if the illness is more severe?

The more severe illnesses, such as heart attacks, cancer or strokes, generally have a longer lasting impact and require a more comprehensive and permanent solution. 75% of your income may not allow you to maintain your lifestyle for the time you are unable to work which is when trauma cover could be an effective solution.

Trauma cover is specifically targeted at those very ‘life changing’ illnesses and as such it may be used to ‘turbo charge’ your income protection strategy as the benefits received are tax free.

Let’s take the example of Terry, who earns $100,000 and whose main expense is a mortgage of $250,000, which reduces his income by approximately 25% due to monthly repayments. Terry can insure $75,000 of his annual income with income protection, but he can then turbo charge this with a trauma cover plan of, say, $250,000.

If Terry was to suffer a heart attack, cancer or one of the other specified traumas, it is possible he can use the $250,000 trauma cover payment to payout his mortgage, which effectively reduces his monthly expenses by 25%. He has effectively removed the stress of having to pay the mortgage and his income protection should now be sufficient to cover his other monthly living expenses, without compromising his lifestyle.

Of course this is just one example of how you can use the trauma cover ‘turbo charge’ concept. The amount of trauma cover you take out and what you choose to do with the benefit payment are going to depend on your individual situation and requirements.

If you want a more comprehensive solution for total lifestyle protection, then you may consider integrating some trauma cover into your planning to complement your income protection.

For further information, or to set up an obligation free consultation, contact us today.


RI Advice Group Pty Limited (ABN 23 001 774 125), Australian Financial Services Licence 238429. This information does not consider your personal circumstances and is general advice only. You should not act on the information provided without first obtaining professional financial advice specific to your circumstances.
* The taxation position described is a general statement only and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation. Please contact a taxation specialist to discuss your individual situation.