Do I need life insurance or income protection?
What is income protection?
An income protection policy will pay out up to 70% of your income if you’re unable to work because of illness or injury. Payments are usually monthly and will be made for a set amount of time or until you reach a certain age. Income insurance can also come with several benefits depending on your level of cover, such as death benefits payable as a lump sum or reimbursement of costs for retraining.
Do I need income protection or life insurance?
To decide if you need income protection insurance, start by looking at your living expenses and calculate how much they would cost you on a month-to-month basis. To help you consider your living expenses, use the below as a guide to some of the most common living expenses:
- Household expenses (e.g. groceries, electricity, water bill).
- Home loan repayments or rent.
- Credit card and other debts (e.g. car loans).
- School fees.
Now, consider the additional cash you’d have to pay to help fund your lifestyle and outgoings if you were ill or injured. Perhaps you have health insurance to ease some of this burden, but keep in mind that it may only cover the cost of your treatment and rehabilitation. If you were out of work for weeks, months or even years while you recover, how would you replace your income?
If you’re now thinking to yourself that you might struggle to afford all that without a steady salary, it may be wise to consider income protection insurance.
Expert tips on choosing life insurance and income protection
Our life insurance expert, Steven Spicer, has some tips on how to decide if you should consider life insurance, income protection or both.
Steven Spicer
Executive General Manager – Health, Life & Energy
Check your Product Disclosure Statement
Whether you take out life insurance or income protection, it’s important to carefully read the Product Disclosure Statement for any policy you’re considering. The PDS contains all the relevant information that can help you decide if the policy is right for you.
Take your income into account
Income protection insurance will usually cover up to 70% of your gross income, so remember to take this into account when balancing your finances. Consider if you’d be able to live your current lifestyle on 70% of your income, and if not, what sacrifices you are willing to make.
Keep your workplace benefits in mind
Before deciding on the best income protection policy for you, remember to take into account the benefits offered by your current place of employment. Depending on your allotted sick days and paid leave, you can tailor your policy to suit your needs.
Income protection vs other types of cover
Some of the below products share similarities, which means it’s a good idea to shop around and see which product may best suit your needs. Consider speaking to a financial adviser to decide which insurance policy and level of cover may be best for you.
Difference between life insurance and income protection
Life insurance pays a lump sum of cash if you either pass away or are diagnosed with a terminal illness. Income Protection pays a monthly benefit if you’re unable to work due to illness or injury. Some income protection policies may pay a death benefit if the person who holds the policy dies; however, its main function is to insure your income, not your life. Before deciding to apply for a product, you should refer to the Product Disclosure Statement to confirm what features and benefits apply to the individual policy.
Difference between TPD insurance and income protection
Total and permanent disability (TPD) insurance pays a lump sum of cash if you become permanently disabled or can’t work because of illness or injury in either your own occupation or any other field you may be qualified to do.
The key difference is that TPD pays you a lump sum should you be unable to ever work again, in either your own occupation or one you’re reasonably qualified to complete. Income protection will replace up to 70% of your monthly income until you’re able to return to work or you’ve exhausted your benefit period, whichever happens first.
Difference between trauma insurance and income protection
Trauma or critical illness insurance pays a lump sum if you suffer from a listed medical event (e.g. cancer, stroke, heart attack). Both Trauma and Income Protection pay living benefits, however, the difference between the two is that trauma insurance pays a one-off lump sum cash benefit, upon diagnosis, while income protection pays a monthly benefit should you suffer from a prolonged injury or illness which impacts your ability to work for longer than the waiting period.
Difference between workers’ compensation and income protection
Workers’ compensation in Australia pays a cash benefit and may cover both your calculated wages and healthcare expenses if you’re injured or become sick because of your work. A workers’ compensation claim doesn’t mean you can’t also claim on your income protection, but it may mean you receive a reduced insurance benefit or none at all.
While workers’ compensation is a fantastic initiative, unfortunately, it doesn’t cover everything. If you’re unable to work due to an injury sustained outside of work, you won’t be able to make a claim. In this situation, an income protection policy might help handle your finances instead so you can focus on recovery.
Who can benefit from income protection?
Australians over the age of 18 who rely on their income to sustain their lifestyle expenses may benefit from Income Protection insurance.
Income protection policies can assist with meeting your fixed expenses, including debt repayments, utilities, grocery expenses, and childcare expenses, helping to ease the financial burden and allowing you to focus on getting better and back to work sooner.
Income protection premiums may be tax deductible, and this is something you may consider speaking to a financial advisor about.
It’s important to note that should you claim on the benefit, you will be required to pay tax on any benefits paid.
- Those with debt. Whether it’s mortgage or credit cardrepayments, it may be worth insuring your income to make sure your debt doesn’t snowball.
- Single income households. Income protection can help you take care of yourself and your loved ones in the short term, especially if you’re the sole income earner for your family.
- Self-employed workers and business owners . Would your business struggle if you were unable to work? Income protection may assist you in paying off small business loans and other expenses while you recover.
- Tax-savvy Australians. Did you know that income protection premiums may be tax deductible? Provided you don’t pay your insurance premiums through your superannuation (i.e. before tax), you may be able to reduce your taxable income. The amount will depend on your marginal tax rate, your income and several other factors.
The information provided here is general in nature only and does not consider your personal objectives, financial situation or needs. Before you decide to purchase a product, it is important to read the relevant Product Disclosure Statement.
Meet our life insurance expert, Steven Spicer
As the Executive General Manager of Health, Life and Energy, Steven Spicer is a strong believer in the benefits of private cover and knows just how valuable the peace of mind that comes with cover can be. He is passionate about demystifying the health insurance industry and advocates for the benefits of comparison when it comes to saving money on your premiums.