Although you are young, income protection can be a key consideration.
Being in your twenties might seem like an early age to start thinking about income protection insurance, but as this guide reveals, you’re never too young to start planning for your future and protecting yourself from life’s unexpected curve balls.
Should I get income protection in my twenties?
You may be wondering if taking out income protection insurance when you are in your twenties is necessary. Remember, illness and injury can befall anyone at any time regardless of your age.
Income protection insurance pays up to 75% of your current wage if you are unable to work due to sickness or accident. If you have a good job, protecting your income will ensure you can continue to pay your bills, maintain your current lifestyle and continue saving for your future financial independence.
Your twenties are the period in your life when you are starting to find your financial feet. You are in the early stages of a career and the likelihood of a family and a mortgage are on the horizon. Protecting your income during this vital stage will ensure your wealth building isn’t cut short through circumstances beyond your control.
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Pros and cons of getting cover in your twenties
There are some clear advantages to taking out income protection in your twenties:
- It is significantly cheaper to buy when you are young and healthy, particularly if you are planning on holding the policy for many years.
- It has financial advantages, including adding to your equity (financial worth) and making loans easier to obtain.
- You can claim a tax deduction for your income protection premiums.
- You will protect any savings or investments you have accumulated so you won’t have to use them to pay for daily expenses.
There are a few disadvantages to having income protection insurance in your twenties:
- You might be living at home and attending university, in which case you have no income to protect.
- You may not be able to afford it if you are still on a low wage (in which case you could investigate whether you have it by default through your superannuation).
What factors should I consider before getting a policy at this age?
How the following factors relate to your individual circumstances will help you determine how much income protection insurance you need and can afford.
Insurers will determine your occupation’s level of risk and charge accordingly for your premiums. Your occupation will either be a standard risk occupation (no specific workplace hazards) or special risk (involving hazardous daily tasks and exposure to risks that can affect your physical or mental health).
How much you earn
Another factor insurers will take into account is how much you earn. If you are a white collar professional, your level of income will be higher and more expensive for insurers to cover. This is partly why income protection insurance is limited to 75% of your wage. Your insurer wants to encourage you to return to your occupation as soon as possible. Obviously, a high salary will translate into higher premiums for your cover.
A third factor that may affect the cost of your income protection insurance is your health. While medical and blood tests are often not required, your insurer may ask you a series of health-related questions and if it emerges that you have pre-existing medical conditions or a family history of disease, your premiums and level of cover may be affected. Generally though, as a person in your twenties, health issues will not be a major influence on price.
If I do get income protection now, will I be able to hold that rate until I get old?
This depends on whether you choose stepped or level premiums. Stepped premiums start out relatively cheap in your early years and get more expensive as you get older. The advantage of stepped premiums is that insurance is more affordable when you’re young and on a low salary and still quite manageable in your later years when you are earning a great deal more.
Level premiums on the other hand, start out higher than stepped premiums and continue at the same rate every year. So, if you can afford them now, you will certainly be able to afford them later on as they won't go up, apart from indexation, which is an annual CPI rise of around 5% p.a. to keep pace with inflation.
If you’re short of cash now but envisage a high salary down the track, stepped premiums could be for you and level premiums may be the answer if you’re looking to maintain approximately the same premium rate throughout the life of your policy.