Are you looking for cheaper income protection premiums?

There have been sharp hikes in income protection premiums in recent years, with some increases as high as 70%. These increases were largely in response to rising claims, with research from KPMG and Financial Services Council estimating that Income Protection claims doubled between 2014 and 2018.

Over 2023, Insurance Watch has observed that rates on new income protection policies have steadied, with average premiums falling by 5%*. However policies taken out before the 2021 APRA changes have continued to experience premium increases.

You know that income protection insurance is important for your financial security should you be unable to work due to illness or injury. But if you are experiencing rising cost of living expenses how do you keep the cost affordable?

We provide some suggestions below how you can get cheaper income protection insurance premiums. Just shopping around can save you up to 60%*.

A word of caution – the cheapest income protection cover is not always the best cover. Changing cover to achieve cost savings may mean losing benefits or features which would be desirable should you have to claim.

So, before acting on any of these tips, you need decide whether you value the savings more than the cover given up, taking into account your situation.

Find cheaper income protection insurance

1. Remember to claim a tax deduction for your income protection premium

If you pay for your income protection premium personally (i.e. not through your super fund) you can generally claim a tax deduction at tax time. Depending on your income level and your marginal tax rate you could receive up to 49% of your premium back as a tax refund.

Find out more about how the income protection tax deduction works.

2. Indemnity policies are cheaper than Agreed Value – but have risks

Prior to intervention by APRA on 1st April 2020, income protection policies came in two types – Indemnity and Agreed Value.

Agreed Value policies cost on average 20% more than Indemnity policies, so if you have an existing Agreed Value policy you may be able switch to Indemnity cover may a saving. However with an Indemnity policy there is a risk that you will receive less than the monthly benefit on your schedule if your income falls after you take out your policy. So the premium saving has to be weighed against this risk.

If you are self-employed with a fluctuating income or likely to take an unpaid break from work (e.g. to have children) then an Indemnity policy may not be suitable for you. However if you are salaried with good job security or you are insuring an amount well below the maximum of 70% of income (or 75% for pre 1st October 2021 policies) the risks associated with an Indemnity policy may be lower.

There are also different types of indemnity cover. With an older policy you may have the option of Indemnity cover which uses your highest 12 month income in the last 3 years, rather than just using your last 12 months income, as is typically the case with new policies. A 3 year lookback period can give more flexibility in the event you suffer a drop in income prior to lodging a claim.

3. Extending your waiting period could reduce premiums by 42%*

One of the biggest reductions in your income protection premiums can be achieved by increasing the waiting period on your policy.

While a short waiting period may be desirable because payments from the insurer will start quicker, it comes at a cost.  Increasing your waiting period from 14 days to 30 days could reduce your income protection premium on averaged by 42%*. Similarly increasing your waiting period from 30 days to 90 days could reduce your premium on average by 36%*.

Before extending your waiting period you need to evaluate whether you will be able to make ends meet. When you go on claim the first payment from the insurer may not be received until a month after the end of the waiting period, depending on the insurer’s payment cycle. So in the case of a 90 day waiting period it may be 120 days before the first payment is received.

Factors to consider would be how much sick leave you have, if your spouse’s income can cover immediate expenses, whether you have savings or investments to draw on and whether you could receive other family support until the insurer’s payments begin.

4. Consider whether the claims escalation benefit is worthwhile

Insurers charge on average 11% extra* to include a claims escalation benefit (also known as a claim indexation option or increasing claim benefit). This benefit increases your monthly benefit by the inflation rate each year while you are on claim to ensure that its real value is maintained.

Whether this benefit is important will depend on your circumstances. For example, if you are aged 35 and your policy has a benefit period to age 65 then including the claims escalation benefit is likely to be critical. This is because if you suffered a long term injury and needed to claim over 30 years, your benefit would slowly shrink in real terms without indexation to inflation.

However if you are older with only a few years to retirement, or you have a benefit period of only 2 years or 5 years, then including the claims escalation benefit may be less crucial, depending on the rate of inflation which is expected. In this case you may value the premium saving more than this feature.

5. Make sure your occupation category is correct

One of the major determinants of your income protection premium is how the insurer rates your occupation. Some of the factors insurers look at is whether your occupation requires you to be office based, mobile, working underground or at heights. Also taken into account is the extent of manual work you do, your qualifications and years of experience. An increased level of income may also lift your occupation into a higher category.

If you have recently received a promotion or salary increase, become qualified, or moved from a “hands-on” job to more of a managerial role, you could ask to have your occupation category reassessed as this could result in a lower premium.

Occupation rating is one of the biggest factors in determining premiums. For example, the cost of income protection insurance for a plumber can be as much as double the cost of an office based accountant.

6. Do you need the extra benefits of a Plus policy?

Before 1st October 2021 many insurers offered two levels of income protection – a standard/basic policy and a plus/premier policy. The premium difference between these covers could vary between 10% and 30%*. If you have an old “Plus” policy you may be able to remove the extra benefits and receive a premium saving.

Why pay extra for a Plus policy? The additional benefits offered by a Plus policy generally include set payments for specified injuries and trauma conditions, payments for full time nursing care, home help or care by a family member, expenses paid for accommodation and travel if disabled away from home and payment of rehabilitation expenses and incentives. In addition Plus policies will usually have more generous definitions of total disability, partial disability and more flexibility for future increases without medicals.

However if you do not value these extra benefits and you just want to cover against a “worst case” long term disablement scenario then basic cover may be all you require. This could be the case for example if you have sufficient savings to cover a short term illness or injury, or if you already have separate trauma cover.

7. Consider lost benefits before switching to a new income protection policy

If you have an Income Protection policy issued before APRA’s intervention October 2021 it could include a number of features which are no longer available in new policies.

Some of these are:

  • Cover for up to 75% of income including superannuation
  • “Own Occupation” total disability benefit to age 65
  • Generous indemnity definitions (e.g. highest 12 months income in last 2 to 3 years)
  • Three tiered definition of total disability (e.g. duties, income and hours)
  • Partial disability from day one (i.e. no period of total disability required)
  • Guaranteed future insurability to make increasing cover easier without a health reassessment
  • Needlestick cover – useful if you are a medical professional

New policies are generally cheaper than than the more generous pre 2021 policies. It is also worth noting that APRA expects premiums for new policies to be more stable over the long term compared to pre-intervention policies.

However you should take the time to understand what the loss of these benefits/policy definitions could mean for you in the event of a claim before switching. You can use Compare Quotes Online to view quotes and benefits for new policies.

8. Take out a level rather than a stepped premium

As level premiums usually cost more initially than stepped premiums this may not sound like a saving measure. However if you hold your policy for more than 10 to 15 years a level premium may save you a significant amount of money in terms of the total premiums paid over the period.

However the potential to save money is higher the younger you are when you take out a level premium. This is because the cost of the level premium relative to the stepped premium is likely to be less when you are younger and you will have more years over which to reap the savings once the stepped premium rises above the level premium.

Before taking out a level premium is it important to consider whether the expected time horizon for your cover is greater than the breakeven period and the risks of this strategy.

9. If cash is short you can pay for your income protection from super

If you can afford to pay the premium for your income protection personally this will usually be tax effective and potentially give you access to more benefits and features than a super policy.

However if your finances are tight, and you would not otherwise be able to afford your desired level of income protection cover, you may consider using your super fund to pay some or all of your premium.

Your existing industry super fund may be able to offer income protection at attractive rates, particularly if group rates are applied. However superannuation cover has a number of shortcomings: cover will only be available while you are employed and contributing to the fund (which means no cover during breaks from work), claims may take longer and the terms and conditions of super cover are not guaranteed and can change if your super fund changes insurance companies.

Also many superannuation funds offer income protection which is limited to a benefit period of 2 years. It may be possible to supplement a 2 year super policy with another policy with a benefit period to age 65. The second policy could have a 2 year waiting period so that its cover starts when the other policy ends. However it is usually cheaper to have just one policy (see below).

Most retail income protection policies can be issued under super and paid for with a rollover from your existing superannuation fund once a year. Many of these will offer complementary cover outside of super for any periods of unemployment.

The main downside of this approach is that over the long term your retirement savings will be reduced by the payments used to pay the premiums. For this reason this strategy should be reserved for situations where cashflow is limited and you have weighed the erosion of your super against your other priorities.

10. It usually doesn’t pay to have more than one income protection policy

Having more than one income protection policy can mean you end up paying too much for your cover. Each policy could have a fixed policy fee (between $60 and $100 a year) and you may miss out on large sum discounts (see below). Also at claim time it is going to mean having to deal with two insurance companies instead of one!

You may also be overinsured by having more than one policy. There is usually a limit of 70% (75% for policies issued before 1st October 2021) of your income which can be covered across all policies. This means that if you have two policies and the monthly benefits add up to more than 70% at claim time then one of the policies will be “offset” i.e. the benefit will be reduced so that you do not receive more than 70% of your income. This could mean that you have paid premiums for cover in excess of what you can receive.

11. Reducing your benefit period could reduce premiums by 45%*

Income Protection policies typically have benefit periods of 2 years, 5 years or up to age 65. The longer the benefit period, the more expensive are the premiums.

The savings available for reducing your benefit period will depend on your age and a number of other factors. In the example used of a 40 year old male accountant looking to reduce their benefit period from age 65 to 5 years the savings are on average 45%*. However the saving is smaller for reducing the benefit period from 5 years to 2 years – in the same example this would be on average 18%*.

However the potential benefits being given up in the event of a long term claim need to be considered. For the example given, where the monthly benefit is $6250, a benefit paid to age 65 could amount to $1,875,000 in cumulative payments compared to only $375,000 for a 5 year benefit period – a difference of $1,500,000. After the 5 year benefit period the payments cease, even if you are still unable to work.

Depending upon the size of the premium saving, consideration could be given to spending some of this on topping up TPD (Total and Permanent Disablement) cover which would provide a lump sum in the event that the illness or injury becomes permanent.

12. Check around before accepting a loading or exclusion

If you have a health condition you may find that an insurer imposes a loading on your premium of 50% to 400%, or excludes the pre-existing condition from coverage. Before accepting these conditions it is important to check whether these would be applied by other insurers. Each insurer has their own internal guidelines and also restrictions imposed by their reinsurer. This can result in a wide variance in the way that different conditions are treated. An exclusion or loading may also be able to be lifted after a period without symptoms or treatment.

For example, BMI or Body Mass Index is used by a many insurers as an indicator of future health. Your height/weight ratio may mean that a loading is imposed by one insurer, but another insurer may have higher limits and be willing to provide the cover at standard rates.

If you seek personal advice from an Insurance Watch adviser they can obtain preassessments (based on a brief description of your condition) from some other insurers to see what terms they may apply. The results may surprise you.

13. Is the monthly benefit what you really need?

Not everybody needs to cover the maximum percent of their income – which is 70% now or 75% (including super) for pre 1st October 2021 policies.

It may be that you and your family could survive long term on a much lower amount. It is important to calculate how much you spend on core living expenses such as groceries, electricity, gas and water bills, mortgage/debt repayments, school fees, health insurance and ensure that these would be covered by your monthly benefit (allowing for tax which would be payable on the benefit). You also need to consider whether you would be able to adequately save for your retirement and meet future costs if you were to receive an amount less than 70% or 75% of your current income.

Automatic indexation increases in line with inflation (CPI) to your monthly benefit each year assume that your income is increasing at the same pace. But sometimes your income increases by less than this, resulting over time in a monthly benefit which exceeds the cap under your policy. For Agreed Value policies this is not an issue, but for Indemnity policies this could mean that you are over-insured and will not be able to receive all of the monthly benefit on your policy schedule if you make a claim. It is therefore important to review your monthly benefit each year to ensure that it remains relevant.

14. Large sum discounts mean sometimes more cover costs less!

A little known fact is that insurers offer large sum discounts for income protection which cut in at certain monthly benefit levels. The levels vary between insurers, but can result in discounts of up to 10%* if your monthly benefit exceeds $4000 or $5000.

This can mean that a monthly benefit of $4000 can cost less than a monthly benefit $3750. Other levels of monthly benefit which can attract large sum discounts are $7500, $10,000, $15,000 and $30,000. But you will need to have the income to support these higher benefits!

15. Consolidate all of your insurance covers with one insurer

Insurance companies offer incentives to encourage you to take out all your covers with them. In some cases multipolicy discounts of up to 15% are available when Life/TPD, Trauma and Income Protection covers are taken together under one policy. This can be on top of a policy fee saving of $60 to $100 per year for each additional cover.

By asking for a packaged quote you will be able to work out if the discounts from consolidating your covers will reduce your overall cost compared to having policies from different insurance companies.

AIA also offers an additional discount if an AIA Income Protection Priority Protection policy and AIA Health Insurance with Vitality offering is taken out – with an additional 5% saving available.

16. Discounts may apply if a family member also takes out a policy

Multi-life discounts are offered by some insurers such as OnePath and MetLife. If you and an immediate family member takes out a policy with one of these insurers a discount of up to 5% could apply to both policies.

The other policy does not have to be income protection – it could be Life, TPD or Trauma insurance. “Family members” can include your spouse, defacto, son, daughter, father, mother, father-in-law, mother-in-law, brother or sister. In some cases these discounts are also available for business relationships, including for members of the same SMSF.

17. Take advantage of Healthy Lifestyle discounts

Life insurance companies are starting to reward their clients for looking after their health. Most of these “lifestyle” discounts only apply to Life/TPD and Trauma insurance. However there is one insurer currently offering a discount on income protection premiums.

If you have an AIA income protection policy and join the AIA Vitality health and wellbeing program you can receive a 7.5% initial discount on your premium.

To keep this discount past the first year there are health checks and activity targets to meet. If you already actively maintain your fitness you may easily meet these. Otherwise if you are looking to improve in this area, the discount can give you added motivation!

18. Pay premiums annually or half yearly, rather than monthly

Insurers generally charge extra for monthly premiums. If you can afford to pay your premiums annually rather than monthly you can save between 6% and 9%*, depending upon the insurer. In some cases these savings are available for half yearly premiums as well.

19. You may be able to suspend your policy if suffering financial hardship

If you run into tough times financially or become unemployed for a period of time and cannot pay your premiums, your policy may allow you to suspend the premiums for up to twelve months until you get back on your feet again. You will not however have cover for any medical condition or injury which first occurs during the suspension period.

Although you will not be covered while the policy is suspended, this is preferable to cancelling your policy, because when you are ready to resume your policy you will not have to re-apply or undergo medical underwriting.

20. Different insurance companies rate you differently – so shop around!

There are certain factors affecting the cost of your income protection which you can’t change e.g. your age, your gender, your smoking status, your occupation and the state you live in. But because different insurers apply different pricing factors there can be large variations in pricing.

For a 40 year old accountant taking out an indemnity income protection policy on the Insurance Watch website the difference between the lowest premium and the highest premium is around 60%*.

Insurance companies do not always reward loyalty. New customers often receive first year discounts which fall out over time. ASIC has recently criticised duration-based pricing which penalises customers who stay with the same insurer long term. Avoid paying a lazy tax!

So what are you waiting for? Compare Quotes Online now and save.

* The average savings quoted in this article are based on the range of income protection policies compared by Insurance Watch for a male 40 year old non-smoker accountant in Victoria with a monthly benefit of $6250, waiting period 30 days, benefit period to age 65 including claims escalation as at 15th February 2024. The savings for your personal situation may be different.

Please note the above is general advice only and does not take into account your particular circumstances, such as your objectives, financial situation and needs. If you would like advice on your personal situation please go to Get Advice.