Stay financially fit: How Income Protection insurance can help

5-minute read

What you'll learn

• The basics of income protection insurance
• Benefits of income protection during illness or injury
• The differences between income protection and other types of life insurance
• Is income protection insurance worth it?

The basics of income protection insurance

Income protection insurance works by providing an income replacement payment when the person insured is unable to earn an income due to injury or illness. Benefits are usually paid as monthly payments representing a portion of pre-disability income. The portion of pre-disability income paid as a monthly benefit will depend on the pre- disability earnings, with most income protection policies typically paying a benefit of up to 70%. The amount of the monthly benefit will be assessed at claim time and is based on the lessor amount insured and a percentage of the insured’s income at claim time. Depending on the income protection policy and/or insurer, the policy may include a contribution to superannuation as well as the benefit paid to the insured.
 

The monthly benefit is usually paid after a specified waiting period, depending on the policy, with waiting periods often being 30, 60 or 90 days. The benefit is continued to be paid monthly until the insured reaches the policy's maximum benefit period, which may be anything from 2 to 5 years or up to age 65.

Benefits of income protection during illness or injury

The most fundamental benefit of income protection insurance is that it ensures that the insured can continue to receive a portion of their pre-tax income when they are unable to earn an income due to the insured’s illness or injury. Thus, when faced with a situation that prevents the ability to earn an income, the policy can provide an income to support everyday expenses. Below are the key benefits of income protection insurance.

Income protection can be customised

Income protection insurance allows the flexibility to tailor the level of protection that suits the personal circumstances of the applicant. It can be customised in some of the following ways:

Waiting period

Income protection insurance premiums can change depending on the waiting period selected. The waiting period is the agreed amount of time after suffering from a disabling injury or illness that the person insured must be unable to work and wait before being eligible to make a claim and receive a benefit. Short waiting periods (for example, 30 days) will generally have a higher premium applied than a longer waiting period (for example, 90 days or longer).

Benefit period

The benefit period is the maximum amount of time the person insured can receive a benefit. Longer benefit periods will generally be more expensive than shorter benefit periods.

Premiums types

The two common premium structures offered by Life Insurers are Variable Age-Stepped (previously called Stepped Premiums) and Variable Premiums (previously called Level Premiums).

• Variable Age-Stepped Premiums
  • Are calculated based on the age of the insured at each Policy anniversary.
  • As the insured person ages the premiums usually increase to reflect the increased likelihood of claimable events over time.
• Variable Premiums 
  • Are calculated based on the age of the insured at the Policy start date
  • In earlier years these premiums are generally higher than aged stepped however in later years may be comparatively less than aged stepped because the annual premium does not increase with the insured age. 
• Also available from some insurers are Fixed and Fixed Age-Stepped Premiums, which sets the premium amounts and may be reviewed after a set period (e.g. one year). 

Premiums can also change due to any tax, duty or charge or changes introduced by government, or if the insurer changes their premium rates. Both Premium structures can change for a range of other reasons, please see the relevant product PDS for more details. 

It is best to compare life insurance policies with different life insurance providers to find the right policy that fits individual circumstances.

Income protection premiums may be tax deductible

Premiums on income protection insurance, where a recurring benefit is paid and when the policy is held outside of the superannuation environment, are generally tax deductible, which can make it a cost-effective option. Check this with an accountant or the ATO to ensure the eligibility criteria.

Less reliance on savings

Without income protection insurance one might need to rely on savings to cover expenses during a period of incapacity and reduced earnings. This insurance may help preserve existing savings if the level of cover is sufficient to manage ongoing expenses.

Regular reviews and adjustments

It is important to regularly review income protection policies to ensure they continue to be relevant to one’s circumstances.  As life circumstances change, policies should evolve with them, including adjustments to the waiting period, benefit period, and the insured amount as one’s financial situation changes.

The differences between income protection and other types of life insurance

Income protection insurance is designed to replace a portion of one’s income as a monthly payment if the insured is unable to work due to illness or injury. The payout triggers for other types of life insurance maybe death, becoming totally and permanently disabled (TPD) due to illness or injury, losing the ability to work again in one’s own or any occupation, or a diagnosis of a specified critical illness or medical condition (critical illness, or trauma).
 

While one can customise income protection policies by choosing a different waiting period, benefit period and coverage amount, other forms of life insurance are designed to provide a lump sum benefit which is a fixed benefit amount for a specific event or condition. This offers less customisation for the usage of the benefit.
 

The focus on life insurance coverage also changes depending on the type of life insurance. Life insurance provides coverage for beneficiaries when the insured passes away. Critical illness (or trauma cover) is designed to provide financial support when the insured has been diagnosed with a specified critical illness or medical condition. TPD insurance primarily addresses situations where the insured is permanently disabled and unable to work.
 

It is important to view the relevant Product Disclosure Statement when considering income protection insurance.  Find out more by visiting the TAL website.

Is income protection insurance worth it?

Income protection insurance provides a monthly payment which can help support financial well-being and peace of mind when the person insured is unable to earn an income. Whether the income earned is from self-employment or working for a company, income protection insurance is an insurance policy that can aid in protecting a financial future and is a key component of a comprehensive financial plan.
 

By understanding the basics of income protection insurance, an informed decision can be made to ensure that one’s ability to provide an income remains secure, even in challenging times.