What is income protection insurance?

Learn how income protection insurance provides financial support during illness or injury, ensuring stability during recovery.

Por: talita melz em October 28, 2024

Income protection insurance is a financial solution designed to provide you with a regular income if you’re unable to work due to illness or injury. This cover is essential for keeping your finances stable during your recovery, replacing a significant portion of your lost income so you can focus on getting better without worrying about bills.

What income protection insurance covers

In cases of partial or total disability, income protection insurance offers up to 90% of your pre-tax income for the first six months and up to 70% after that period.

Each policy sets its own definitions of partial or total disability, and these should be reviewed directly with the insurer or in the Product Disclosure Statement (PDS), where you’ll also find details of any exclusions.

This cover is designed to replace your income based on your annual earnings in the 12 months prior to your illness or injury, providing financial stability in uncertain times.

Do I need income protection insurance?

Income protection insurance can be especially relevant for self-employed individuals, small business owners, and freelancers, as these groups typically don’t have access to paid sick leave or annual leave benefits. This cover is also ideal for those with dependents or family members who rely on their income, or for anyone with significant debts or commitments, like a mortgage, that require regular payments.

Important considerations

When assessing the need for income protection insurance, also consider the following:

If you have total and permanent disability (TPD) or trauma insurance, these may help cover lost income.
Check whether your private health insurance covers any potential medical expenses that may arise.
Think about the support available from family or friends who might be able to temporarily cover some expenses.

For a more informed decision on whether you need income protection insurance and the ideal level of coverage, it’s advisable to consult a financial adviser. This professional can help determine how much of your income should be insured to cover essential expenses and maintain your financial stability.

Choosing an income protection policy

There are several factors to consider when selecting an income protection policy. Below are the key elements to look at to ensure it meets your needs:

Waiting period

The waiting period is the time you must wait before payments commence. Most income protection policies offer a waiting period that ranges from 14 days up to two years. During this period, you must be unable to work due to illness or injury to be eligible for payments.

This factor also influences the policy’s cost: the longer the waiting period, the lower the premium. Assess your savings and emergency funds when choosing this period, as it should cover your living costs while you wait for payments to begin.

Benefit period

The benefit period is the length of time that monthly payments will be made if you remain unable to work. Policies typically offer a benefit period ranging from two to five years, or until a specific age, such as 65.

Similar to the waiting period, the length of the benefit period affects the cost of the policy: the longer the benefit period, the higher the premium. However, a longer period provides extended protection in the case of long-term incapacity.

Stepped or level premiums

Income protection insurance premiums can be paid in two ways:

Stepped premiums: The amount is recalculated at each policy renewal and tends to increase over time, taking into account the rising risk of a claim as you age.
Level premiums: The initial premium is higher but does not increase with age, which may make this option more cost-effective over the long term.

Choosing between stepped or level premiums will affect premium costs over time, so it’s important to select the one that best aligns with your financial planning.

How to purchase income protection insurance

Before buying an income protection policy, check if you already have any coverage through your superannuation fund, as many super funds offer standard income protection insurance that usually comes at a lower cost.

If you prefer broader or more customised coverage, you can purchase a policy through an insurer, insurance broker, or financial adviser.

Premiums paid for income protection policies purchased outside of superannuation are generally tax-deductible and these policies offer more features and benefits.

Information to provide when applying

When applying for or modifying an insurance policy, the insurer may ask questions about your age, occupation, income, medical history, lifestyle, and even high-risk hobbies like extreme sports. This information is crucial for the insurer to determine aspects such as premium costs and the terms and conditions of the policy.

It’s essential to answer these questions honestly and thoroughly, as inaccurate or incomplete responses could lead to issues with a potential claim. Key points to consider include:

Factors such as age, gender, income, and occupation will impact your premium costs.
Pre-existing medical conditions, like diabetes or kidney issues, or if you’re a smoker.
Any circumstances you believe could affect your coverage, such as plans to switch to part-time work in the near future.

Making an income protection insurance claim

To make a claim, check the detailed procedure in your insurance policy, as procedures can vary based on contract terms. Additionally, maintaining clear communication with the insurer is essential to ensure you are adequately covered and to avoid issues when making a claim.

Be sure to keep your policy up to date and maintain clear records regarding your health status and income. If you have any questions, don’t hesitate to seek clarification from your insurer.

In many cases, any payments received may need to be included in your tax return, as they are typically considered taxable income.

What does income protection cover?

Most income protection policies cover some situations but not others, so it’s important to pay attention to these details when finalising a contract with an insurer. Here are some common situations that are generally covered: