What would happen if you were all of a sudden unable to earn an income because of illness or injury?
Would you be able to pay your bills and put food on the table?
Income protection insurance helps make these situations easier by providing ongoing payments to replace your income while you’re out of work.
Here’s what you need to know to find the right policy for you and your family.
What is income protection insurance?
Income protection is a type of life insurance policy that pays out up to 85% of your pre-tax income in the event that you’re unable to work due to serious illness or injury.
You’re required to pay premiums (regular payments) to your insurer and in return, they’ll guarantee to pay out under your policy.
The payout is intended as a temporary support while you get better or look for more work and usually stops after two to six months.
What does income protection insurance cover?
You can use income protection insurance payouts however you like. Costs that you cover with your payouts might include:
- Rent or home loan repayments.
- Bills, including utilities, business overheads and insurance.
- Repayments on personal loans, credit cards and other debts.
- Day-to-day living expenses like food and transport.
Keep in mind that your income protection insurance payouts will equal less than 85% of your pre-tax income - if you usually spend 100% of your income you may need to cut costs to get by.
Do I need income protection insurance?
Losing your income temporarily can be difficult, particularly if you have debt, dependants or high living costs.
When considering income protection insurance ask yourself the following questions:
- Do others depend on my income?
If you have a spouse or children, these are people in your family who may depend on your income.
If you are the sole worker in your household, income protection insurance may be a good idea.
- Do I have financial obligations to meet?
Do you have mortgage repayments to make, bills to pay or business overheads to cover?
Income protection may help you continue meeting these obligations if you were to lose your work.
- How long would my savings cover my living expenses?
Think about you and your family’s living costs.
How long would your savings last if something were to happen and you were unable to earn an income?
If you answered less than six months it may be worth getting income protection insurance for peace of mind.
- Do I have sick leave or other benefits that could help?
Income protection insurance isn’t the only way to cover your expenses if you’re unable to earn an income.
Consider how much sick leave you have at work and whether you’re able to claim any government benefits before buying insurance.
- How stable is my income?
There is a lesser need for income insurance if you’re in a stable salaried job with sick leave and holiday pay.
On the other hand, if you’re freelance, self-employed or a small business owner who doesn’t have those benefits or a stable income, income protection may be a good idea.
- How about my other insurance?
If you already have trauma insurance that may help cover some of your costs if an injury or illness leaves you unable to work.
Many superannuation providers offer insurance by default so it’s a good idea to check yours before buying insurance.
- Can I afford the premiums?
Paying your insurance premiums should never cause financial stress.
Income protection insurance policy features
It’s always a good idea to compare insurance policies online to make sure you’re getting the best possible deal. Take a close look at the following policy features when comparing:
Sum insured
The sum insured or maximum monthly benefit is the maximum amount that your insurance policy will pay out each month when you make a claim.
Usually, this is between $8,000 to $12,000 but it can be higher.
High-income earners should check this before choosing a policy to make sure it will cover their lost income.
Indemnity value or agreed value
Income protection insurance policies determine the amount of your benefit in two ways. One option is indemnity value, a percentage of your salary.
The other is agreed value, a number agreed upon when you sign up for a policy. Agreed value policies are generally more expensive.
If your income fluctuates like most business owners, self-employed people and freelancers, it may be a good idea to select an agreed value.
This fixes your benefit amount so that it’s not tied to your income.
Length of benefit period
The benefit period is the length of time that monthly payments will last. Most policies offer two to five year benefit periods.
How to compare income protection insurance policies
Always shop around and compare income protection insurance policies before choosing.
Look at each policy in as much detail as possible to decide which is most suitable to your circumstances and needs.
- Premium amount
- Waiting period
- Level of coverage and exclusions
- Customer service
- Benefit amount
- Flexibility
- Inflation proofing/benefit indexation
- Partial disability benefit
- Death benefit
- Future life events
Learn more about how to compare life insurance policies before you buy.
Stepped premiums or level premiums
There are two types of income protection insurance premiums:
- Stepped premiums are based on your age - they’re low when you’re younger and get higher as you age.
- Level premiums are not based on your age. They may be more expensive than stepped premiums at first but they won’t increase as much as you age.
Buying income protection insurance
Before you buy income protection insurance you should:
- Check which insurance cover you already have to avoid doubling up
- Check if your superannuation fund automatically provides insurance
When you’re ready to buy income protection insurance you’ll have a few options to choose from, including buying through:
- Insurance companies
- Your superannuation scheme
- A financial advisor
- An insurance broker
If you’re confident that you know what type of insurance and level of cover you need, buying directly through an insurance company or your superannuation scheme may be a good idea.
On the other hand, if you’re not sure what you need it may be best to speak to a financial advisor or insurance broker to get advice before buying a policy.
Cost of income protection insurance
The cost of income protection insurance varies depending on a number of factors including:
- Amount of sum insured: policies with higher sum insured are more expensive.
- Length of benefit period: policies with longer benefit periods are more expensive.
- Length of waiting period: policies with shorter waiting periods are more expensive.
- Premium type (stepped or level): level premiums may be more expensive at first but cheaper in old age. Stepped insurance may be more affordable at first but will increase as you age.
A higher sum insured, a longer benefit period, and a shorter waiting period will all push the price of your premiums upward.
It’s important that you take the time to tailor your policy to your unique financial circumstances so that you have the cover you need and aren’t paying unnecessarily high premiums.
Other personal factors also affect the cost of income protection insurance including:
- Age: Older people pay more.
- Sex: females tend to pay more.
- Profession: working in high-risk professions means you may pay more.
- Health: if you’re unwell or have pre-existing conditions you may pay more.
- Smoking: smokers pay more.
It’s important that you disclose all personal, work and health details when purchasing income protection insurance.
If you leave anything out your insurer may deny you cover if they find out.
Income Protection Insurance FAQs
Am I eligible for income protection insurance?
Most Australian residents over the age of 18 and under the age of 60 can purchase income protection insurance.
Some insurers also require that you work a minimum of 15 to 30 hours a week to be eligible and/or deny coverage for people with pre-existing health conditions or high-risk professions.
Does my income protection insurance cover me if I’m made redundant?
In most cases no, income protection insurance will only payout if you’re unable to work due to injury or illness.
However, some policies include redundancy cover as an added benefit - check with your provider or insurance broker to be sure.
Where should I buy income protection insurance from?
You can buy income protection insurance through:
- An insurance broker.
- Your superannuation.
- An insurance company.
- A financial advisor you trust.
If you’re confident that you know what you need from your insurance policy it may be a good idea to buy direct through your super or an insurer.
On the other hand, if you need help and expert advice buying through a broker or financial advisor may be the better option.
Can I claim tax deductions for income protection insurance?
Yes, in most cases you’ll be able to claim the cost of the premiums you pay for your income protection policy.
You must also disclose any payment received under your policy in your tax return.
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About the Author
Shaun
McGowan
Shaun McGowan
Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.
