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Nothing is guaranteed in life. Having a continuous source of income is something many Australians take for granted. But what would happen if you were no longer able to work? Protecting yourself against the unknown is important and one way of protecting your finances is with income protection.
Income protection insurance helps to protect your income if you are temporarily or permanently unable to work as a result of illness or injury. It will normally cover up to 75% of your salary and can cover you until you’re 65 years of age. Income protection gives you the peace of mind knowing that if you are unable to work, you will still have an income and your family will continue to be provided for.
- Keep reading to learn more about income protection in Australia or enter your details below to receive a quote from a provider.
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Who needs Income Protection Insurance?
Income protection insurance is something that every working person in Australia should consider. However, the group that needs income protection insurance the most is Australian families, those with children and a mortgage.
While older families may have more assets to fall back on and less to pay on their mortgages, young families just starting out in life often have large mortgages with many years still left to run on them. If they were to lose their income, they would very probably lose their homes as well, so income protection insurance is an absolute necessity for this demographic.
What type of benefits are payable?
The main benefits payable under income protection insurance are as follows:
- Total Disability Benefit (TPD). TPD is payable if you are unable to work and are totally disabled. This means you must be unable to perform at least one or two important tasks relevant to your job, you must be under the supervision and care of a qualified medical practitioner and you must not be engaged in any kind of work (paid or unpaid).
- Partial Disability Benefit. A partial disability benefits is payable if you are diagnosed as being partially disabled. This means you must be unable to perform one or more important duties of your occupation, you must be under the care and supervision of a qualified medical practitioner, you must be capable of working and must be earning less than your income prior to your disability.
- Death Benefit. Death benefits are often included in an income protection policy and will ensure your income protection payments go to your beneficiaries if you die while the policy is in force.
- Continuing Superannuation Contributions Benefit. Super continuation insurance may also be included and will ensure your super payments go on being made during your period of disability.
- Child Support Income Benefit. If child support insurance is included in your policy, it is payable as a multiple of your monthly benefit plus a lump sum payment if your child dies.
- Special Risk Benefit. Special risk insurance is optional cover and provides a range of options and benefits for people who work in hazardous occupations.
How do I compare policies?
If you’ve decided to take out income protection insurance and you’ve started comparing policies from different providers, it’s important to look at each from the point of view of how they benefit you personally.
Some useful questions to ask yourself include:
- What is and is not covered? Find out what the benefits and exclusions are.
- Is the cover appropriate for your particular occupation? Consider if your policy takes in the specific risks of your occupation.
- How much will be paid out after making a claim? Make sure the amount you get paid is sufficient enough to cover your debts.
- Is the policy index-linked? An index-linked policy will cost more each year but will increase your benefit to keep up with inflation.
- Does it have guaranteed future insurability? This refers to if you can increase level of cover in future without further underwriting.
- Does it include death cover? Death cover ensures income protection payments will go to your beneficiaries in the event of your death.
- Does it insure for ‘your occupation’ or for ‘any occupation’? If it is for any occupation, you may not receive payment if you are deemed able to perform a job other than your own.
- Is it an agreed value product or an indemnity product ? Agreed value means you paid the based on your income at the time of application. Indemnity refers to your income determined when a claim is made.
- What waiting period can you afford? This means the time you wait after becoming ill and making a claim before you receive any payment. The shorter the waiting period, the higher the premium you will pay.
- What benefit period can you afford? This is the length of time the benefit will be paid once you make a claim. The longer the benefit period, the higher the premium you will pay.
How are premiums calculated?
Like all forms of insurance, premiums are calculated according to a range of risk factors. In the case of income protection insurance, factors considered include:
- Age. The older you are, the more likely you could be to suffer an injury or illness.
- Gender. Premiums vary between males and females.
- Smoking status. Smokers are considered higher risk and will pay higher premiums.
- Occupation. The nature of your job can indicate whether you are more or less likely to suffer an injury or illness.
- Pre-existing medical conditions. These will put you in a higher risk category and will attract higher premiums or even exclude you from cover in some circumstances.
How do I claim?
If you suffer an injury or illness, there are certain steps you must take to ensure that your claim is processed. These include:
- Notifying your employer and your insurer. This can be done by phone and in writing as soon as you experience an injury or illness that is likely to prevent you from working for longer than the waiting period.
- Completing and returning forms required by your insurer. This will include the insurance claim form, statements from your employer and your medical practitioner, your tax file number declaration, certified proof of age and your leave and pay history for the past 12 months from your employer.
- Waiting for your insurer to assess your claim. If approved, you will be notified by your Claims Officer and your payments will commence after the agreed waiting period.
When making your initial application for income protection insurance, it is very important that you answer all questions truthfully and include any information that might affect your insurer’s decision to insure you. Otherwise, when you come to make a claim, it could be denied and you would have been paying premiums for nothing.
Should I take out cover inside or outside of super?
Many people don’t consider taking out income protection insurance because they have some cover through their superannuation. In most circumstances, income protection insurance through a superannuation fund offers much less cover than a standalone policy. The period of cover is also less, usually being no more than two years, compared with a standalone policy that can cover you up to 65 years of age.
There are advantages to taking out income protection through your super fund, including lower premiums, not having to pay tax as you would with a standalone policy and not having to undergo a medical examination, but the downside is less cover when you need it most.
Most experts say that, while there is nothing wrong with having income protection through your super fund, if it doesn’t provide the level of cover you need to protect you and your family if you are unable to work, then you should consider topping it up with a standalone policy to compensate for any shortfall.
Some golden tips when taking out cover
The following are a few tips that may come in handy when taking out income protection insurance:
- When reading a policy, look for offset clauses that may reduce the amount of benefit paid. These may refer to things such as sick pay or Centrelink benefits, which are regarded by insurers as other income.
- Make sure that the waiting period you choose is realistic. If you choose a longer waiting period to reduce your premium, make sure you will have enough sick pay, accrued leave and personal savings to tide you over until the waiting period has been served, otherwise you could be without an income.
- Make sure the policy is a non-cancellable contract. If it is cancellable, the insurer can cancel it prior to renewal because of your claims history or due to any perceived change in the risk potential for your particular occupation.
- Work out whether you have a long or short term need for cover (before deciding on level or stepped premiums). While savings can be made with stepped premiums, if you have a family, a mortgage and a long term need for cover, level premiums might be better for you in the long run.
How is income protection taxed in Australia?
The Australian Tax Office considers income protection to be tax deductible if it is paid under the policy to replace the loss of your income. The ATO does not consider it to be tax deductible if it is paid under a policy to compensate a death, injury or accident, such as under a life insurance, trauma or total permanent disability policy. Income protection insurance is the only type of life insurance with this tax-deductible benefit, which can substantially assist in lightening the load of your premium payments throughout the year.
Some final questions you might have
Q. How much income protection cover do I need?
- A. It will depend on your financial needs such as your daily living expenses, bills, debts, mortgage payments etc.
Q. How can premiums be paid?
- A. Most policies allow for fortnightly, monthly or annual payments. While you will often receive a discount for paying annually, you could also be charged a fee for regular payments such as fortnightly payments.
Q. I am a smoker. Can I still be insured?
- A. Yes, but you will pay higher premiums than a non-smoker.
Q. Can I cancel my policy if I change my mind?
- A. Yes, but you will only receive a full refund if you cancel within the 21-day cooling off period.
Q. If I make a claim, how can I use the money I receive?
- A. Any way you see fit. Unlike mortgage insurance which is tied to your mortgage repayments, income protection insurance allows you to pay whatever debts or expenses you wish.
Q. What factors will determine how much I pay for cover?
- A. Factors such as your age, gender, occupation, health, smoking status, family history and the length of waiting period and benefit period that you select.