Income protection gives many Australians the peace of mind that they will be safe from financial hardship if they’re unable to work due to an accident or sudden illness. It usually covers up to 75% of your income through monthly payments for a set time known as your benefit period (e.g. six months or until you turn 65).
If you’re deciding if you need income protection insurance, consider whether you and your loved ones could get by financially if something unfortunate happened and you could no longer work.
Income protection insurance cover works by insuring you for a certain percentage of your income if you’re unable to work due to illness or injury. The exact percentage of your income you’ll get from your income protection insurance claim will depend on your policy and provider, although 70% is typical. Income protection policies come in one of two forms, agreed value or indemnity value.
Agreed value policies are usually more expensive and cover you for an amount agreed upon by you and your provider when you take out the policy, regardless of your income at the time you make a claim. This type of policy is being phased out and is no longer offered to new customers. However, if you took out a policy before 31 March 2020, you may have still this type of cover.
Indemnity value policies insure you for your monthly taxable income at the time of making a claim. All new policies issued in Australia since March 2020 are indemnity value policies, which may be cheaper but will have less certainty regarding what your benefit payments will be if you have to make a claim. On the other hand, you may receive a higher payout than you would on an agreed value policy if your income grows as you age.
There may be exclusions or restrictions on certain medical conditions, so always refer to the relevant Product Disclosure Statement (PDS) to understand exactly what’s covered under your income protection policy.
Most income insurance providers are subject to the Life Insurance Code of Practice as a condition of their membership to the Financial Services Council. To read the Code of Practice, visit the Financial Services Council website.
The amount you’ll pay in income protection premiums will depend on several things, such as risk factors like age, gender, occupation and smoker status, as well as your policy’s payment structure. Your insurance premiums can come as stepped premiums or level premiums.
Stepped premiums are adjusted annually to account for the increased likelihood that you’ll make a claim as you age and your lifestyle changes. When you get a quote from an insurer, they can provide you with a table that shows how you can expect your premiums to rise over the years. People usually choose a stepped premium option to save on the early years of their policy, or if they only need insurance in the short term. It’s important to talk to a financial adviser to know if this strategy is right for you.
Level premiums spread the cost of your insurance over the life of your policy, so you’ll be charged more than on a stepped premium policy at the start of your cover, and less in the later years. The amount you pay will depend on your age when your policy starts. If you have a policy with a level premium structure, it will typically change to a stepped structure at the review date following your 65th birthday, provided your insurance hasn’t expired.
For both premium types, your premiums can vary if the insured sum changes, either by a voluntary increase or indexation. Your insurer could also choose to increase their premium rates which would affect both stepped and level premiums. Changes in government charges like stamp duty could also lead to an increase in your premiums. For any changes to your insured sum, your premium increase will be based on your age when the increase occurs.
Unlike life insurance and total and permanent disability (TPD) insurance which insure your life, income protection only insures your income, which means it may be tax deductible. There are some exceptions to this, such as if your income protection is through your super fund or if it pays a capital sum to compensate you for an injury.
This is only general advice and does not take your individual circumstances into consideration. For any tax advice, consider consulting with a financial adviser or the Australian Taxation office (ATO).
Income protection insurance is designed to replace your income with regular monthly payments if you’re unable to work due to injury or illness. Life insurance pays out a lump sum in the event that you pass away or are diagnosed with a terminal illness.
Other types of life insurance (like trauma insurance and total and permanent disability [TPD] insurance) have more in common with income protection than standard life insurance, but still differ in that they pay a one lump sum instead of regular instalments. In the case of TPD insurance, you’ll only receive a payout if you’re permanently disabled and unable to return to work, while income protection can be used to keep you afloat while you recover.
Yes, being self-employed doesn’t disqualify you from taking out income protection insurance, although it might have an impact on your premiums. In fact, getting income protection can be particularly important for the self-employed, as you may need to use some of your benefit payments to keep your business going while you’re unable to work so it’s still there for you when you get back.