Income Protection Insurance
What is Income Protection insurance?
Income Protection insurance provides a replacement income stream should you become unable to work due to an injury or sickness. Benefits are paid monthly, not as a lump sum. The amount of cover is restricted normally to 75% of your gross salary.
How much does Income Protection insurance cost?
Income protection insurance premiums vary depending on your occupation and the cover you select. You will need to choose when the income protection payments from the insurer will start (the “waiting period” or “excess period”) and how long the benefit will be paid for (the “benefit period”). Income Protection insurance premiums are more expensive the shorter the waiting period and the longer the benefit period. You can save up to 40% on your premium just by extending your waiting period.
Income protection insurance waiting periods are typically 14 days, 30 days or 90 days. However it may take up to 30 days after the end of the waiting period to receive the first monthly payment depending on the insurer’s payment cycle. Waiting periods of up to 2 years are also available to supplement super fund policies (which typically end after 2 years of payments).
Income protection insurance benefit periods are typically 2 years, 5 years or to age 65, with some insurers also offering to age 70. The benefit period is different to the expiry age of the policy which is when the policy can no longer be renewed. Income protection payments will stop after the benefit period ends, even if you continue to be unable to work due to injury or illness. Therefore the longer the benefit period the better. Policies with a 6 month or 12 month benefit period may provide some short term bill paying relief but are not considered true income protection insurance policies because they do not protect against long term loss of income.
Adding a claims indexation option or claims escalation option will ensure that income protection benefits paid while on claim are escalated in line with inflation to maintain their value in real terms.
To find out how much these different features can affect the price of an income protection insurance policy see 20 tips to lower income protection insurance premiums.
Why do I need Income Protection insurance?
Whether you are single or have a family, you need to ask yourself “how would I survive without my income for 12 months or longer?“
Most people rely on their income to pay bills and maintain a certain living standard. An ongoing income is also necessary to build wealth and provide for retirement. It is the foundation of any financial plan. Without income protection insurance an unexpected illness or injury can create financial insecurity and derail your financial future.
Unlike Trauma insurance, Income Protection insurance does not specify a list of covered conditions, so any illness or injury which prevents you from working is covered. Therefore broader coverage is available for back pain and stress related illnesses which are not trauma conditions. Unlike TPD (total and permanent disability) insurance, Income Protection insurance does not require you to prove that you are permanently unable to work and therefore can cover both short and long term illnesses or injuries (depending upon the benefit period).
Is Redundancy or Involuntary Unemployment covered by Income Protection insurance?
Normally Income Protection insurance policies do not pay a monthly benefit if you are made redundant or involuntarily unemployed. Where unemployment benefits are included in an income protection policy these benefits are usually limited. Some insurers will waive your premium while you are unemployed or will allow you to put your policy on hold for a period of time.
Two of the insurers compared by Insurance Watch have Income Protection insurance policies which will pay your loan repayments for three months while you are involuntarily unemployed, but only if your loans are from their related banks i.e. ANZ for OnePath and CBA for CommInsure.
How much Income Protection insurance cover can I purchase?
The maximum amount of Income Protection insurance cover you can purchase (the “monthly benefit”) is usually limited to:
- If you are employed: 75% of your current gross income (including employer superannuation contributions and packaged fringe benefits)
- If you are self employed: 75% of the income generated by the business due to your personal exertion less your share of expenses.
In some cases the maximum income protection cover level can be increased to 85% by taking out options to provide additional cover for mortgage or superannuation payments.
A lower percentage of income may apply above certain income limits (e.g. for incomes over $250,000) and overall maximum levels of monthly benefit sum insured will apply. The insurer may request financial evidence of your income which can include tax returns, group certificates or a letter from your employer.
Are Income Protection insurance premiums tax deductible?
Unlike other forms of personal risk insurance, income protection insurance premiums are generally tax deductible for most taxpayers. The after tax cost of the cover can therefore be significantly less than the cost of the premium.
Will my Income Protection insurance claim be paid?
Total claims paid by life insurers in the year ending 30 June 2016 amounted to $8.2 billion according to data from APRA.
A review by ASIC in 2016 found that on average approximately 90% of all claims submitted were paid and of these 93% of Income Protection insurance claims were paid. The main reasons for declined claims were non-disclosure at time of application and ineligibility due to policy definitions, limitations, exclusions or pre-existing conditions.
Insurance claims statistics from the insurers show that the highest number of income protection claims are due to: musculoskeletal conditions (e.g. back pain), mental health disorders (e.g. stress), cancers, accidents/injuries and nervous system disease.
If you have taken out an income protection insurance policy through Insurance Watch and you need to make a claim we will help you during the claims process.
Recent Income Protection insurance claims paid to Insurance Watch customers:
• $4,800 – paid to 27 year old carpenter over 2 months for hand operation
• $66,000 – paid to 29 year old administration worker over 15 months due to mental illness
• $15,000 – paid to 33 year old physiotherapist over 3 months for shoulder injury
• $106,500 – paid to 34 year old teacher over 3 years and ongoing for depression
• $117,500 – full and partial benefits paid to 36 year old painter over 12 years and ongoing due to arthritis
• $10,000 – paid to 39 year old physiotherapist over 2 months for foot fracture
• $24,900 – paid to 41 year old surgeon over 2 months for fractured bone in arm
• $232,000 – paid to 44 year old accountant over 3 years and ongoing for chronic fatigue
• $32,900 – paid to 44 year old truck driver over 3 months with tennis elbow
• $8,400 – specific injury benefit paid to 45 year old engineer for fractured hand
• $3,800 – partial benefit paid to 52 year old doctor over 1 month after bicycle accident
• $2,300 – paid to 52 year old tiler for 1 month off work due to injury at work
• $10,300 – partial benefit paid to 56 year old admin officer over 7 months and ongoing for multiple sclerosis
• $230,200 – paid to 57 year old property manager over 4 years and ongoing for back pain
• $13,400 – paid to 63 year old teacher over 3 months for shoulder pain