Chapter 02 – Social Security is Income Protection Insurance

Centrelink benefits are a form of insurance for low income earners.

By definition, low income clients find income protection insurance difficult to afford. (Low income clients find everything hard to afford). The availability of Centrelink benefits means that an income protection policy may not be the best use of the scarce resources available for insurances. Risky as it might sound, it may actually make sense to not take out income protection cover and instead dedicate the scarce amounts available for insurance on TPD and/or death cover. If the client cannot afford much insurance, it is imperative that the client use what money they do have available to manage as much risk as possible.

For a client with dependent children, for example, who can only afford one of income protection or death cover, it might make sense to insure against death. If the client were to die, then the income protection policy will not pay anything, and her children would suffer greatly. If the client were not to die, but was to become unwell, the family is not as bereft as Mum can still get some Centrelink benefits. Her death has a greater impact on the family than her illness; thus, if a choice has to be made, insure against the more devastating event.

Alternatively, it may pay to take a longer waiting period for income protection, with the commensurately lowered premium, and rely on Centrelink for the shorter-term coverage.

The comparable Centrelink benefit to income protection insurance is the Sickness Benefit. This benefit can pay up to around $14,000 per year to an employed person who is unable to work due to illness or injury and who has no liquid assets (i.e. cash in the case of people for whom this type of ‘insurance’ should be considered) on which to rely. There are means tests, but a person can also receive up to $100 per fortnight from other sources (perhaps the default level of cover within their super fund) before the sickness benefit starts to (quite quickly) reduce. 

The benefit also requires that the client utilise any sick leave benefits that may be available – something that casually-employed clients will not have access to anyway.

If the illness or injury is such that the client is disabled, they become eligible for the Disability Support Pension. This pension pays a higher amount of around $23,000 per year.

$14,000 is a not a lot of money to live on. Neither is $23,000. This solution is not one you would want for yourselves or your own kids. But the reality for clients on low incomes is that their options are limited. The low income means that the ‘perfect’ insurance solution of purchasing income protection insurance to more adequately replace the lost wage or salary, plus cover for other situations such as death, may be simply unaffordable (and, thus, not actually all-that perfect).

Clients in this situation face a choice: the scarce resources available to purchase insurance need to be applied with absolute maximum effect. For some clients, the overall effect of their insurances may be maximised if they look to Centrelink to provide at least some of the cover.

In our experience, many clients for whom this would be relevant are not aware that they may be entitled to Centrelink benefits. They can really benefit from an adviser who points out this availability. And while we acknowledge that advisers cannot afford to try to help too many people in this situation (if they cannot afford insurance they cannot afford to pay much for advice either), helping those clients for whom this is an option worth considering can be rewarding in other ways.

The Dover Group