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 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”). Premiums are more expensive the shorter the waiting period and the longer the benefit period.
Income protection 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 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 are not considered true income protection policies because they do not provide long term protection.
Adding a claims indexation option will ensure that benefits paid while on claim are escalated in line with inflation to maintain their value in real terms.
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 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.
Is Redundancy or Involuntary Unemployment covered?
Normally income protection policies do not pay a monthly benefit if you are made redundant or involuntarily unemployed. Where unemployment benefits are included these 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 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 cover can I purchase?
The maximum amount of 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.
A lower percentage of income may apply above certain income limits eg $250,000 and overall maximum levels of monthly benefit sum insured will apply. The insurer may request financial evidence of your income including tax returns over the last 12 months
Are Income Protection insurance premiums tax deductible?
Unlike other forms of personal risk insurance, income protection 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.