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What is income protection insurance?

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.

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When would I be covered by income protection insurance?

EventCan it be covered?
Critical illness
Serious injury
Total disability
Self-inflicted harm
Harm through a criminal act
Normal pregnancy symptoms

Types of financial protection

Income protection

Income protection cover pays out a monthly benefit if you are sick or injured and can’t work, based on your pre-disability income and level of cover.
While it’s different from a life insurance policy, income protection may also offer a lump sum death benefit if you pass away. Other benefits for surgery, retraining and accommodation may also be added to your policy for further cover.

Mortgage protection

Also known as home loan insurance, mortgage insurance can cover your mortgage repayments if you’re unable to make them because you’ve become permanently disabled, been diagnosed with a critical illness or you pass away.
This is different to lenders mortgage insurance which protects the lending organisation if you default on your loan.

Redundancy protection

Redundancy insurance covers you for involuntary redundancy (losing your job through no fault of your own) by paying a percentage of your old income for a set benefit period.

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Optional benefits

You may have the choice of a range of benefits to add to your policy for extended coverage.

Elective surgery

If you have a policy with this benefit, you can claim on your income protection insurance while you recover from an elective surgery. This can be important because elective surgeries aren’t always optional, and you don’t want to be worrying about money while you recover.

Death benefit

Some providers let you add a death cover benefit, which will pay out a lump sum to your beneficiary if you pass away. This benefit might be reduced if you also receive a life insurance payout.

Inflation protection

With inflation protection added to your income protection policy, your benefit amount will be automatically increased by the indexation factor to match inflation. Your premiums may also increase at the same rate. This is a good way to make sure your policy remains adequate over time.

Premium pause

If your policy includes a premium pause benefit, you’ll be able to suspend your income protection policy for a set period of time (e.g. 6 or 12 months). During the pause, you won’t have to pay any premiums, but you won’t be able to make a claim for any events that occur during that time. This is useful for situations like temporary unemployment or long-term leave.

Partial Disability

With a partial disability benefit added to your policy, you’ll be able to make a claim for a reduced percentage of your cover amount if you’re partially disabled and still able to work at a reduced capacity.

Recurrent claim

If you need to make a second income protection claim due to the same or a related condition within 12 months, a recurrent claim benefit will allow you to recommence your benefit payments without having to serve another waiting period.

Understanding Income protection

How does income protection 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.

How much does income protection cost?

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.

Can I claim income protection on tax?

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).

What’s the difference between life insurance and income protection?

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.

Can I get income protection If I’m self-employed?

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.

Anthony Fleming, General Manager

 Top tips for income protection from our General Manager for Health, Life and Income Protection, Anthony Fleming.

  1. If you don’t have enough savings to cover your expenses if you were unable to work for a time due to injury or illness, income protection could be worth considering. It could reduce your financial stress and keep you and your dependents protected.
  2. Providers set their own definitions for partial or total disability under income protection policies that you’ll need to meet before making a claim. Make sure you read your PDS carefully so you’re aware of the inclusions and exclusions.
  3. If you already have income protection insurance, it might be an agreed value policy. In that case, it could be worth checking if it is still suitable for your situation, as your income may have changed since taking out the policy.

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