Income Protection Insurance: Is it worth it?
For many Australians, one of the most important assets is our ability to earn an income.
So when that ability is taken away because of an accident and for an extended period of time, it doesn’t take long for financial pressure to build up. Income Protection Insurance is designed to combat this situation.
Is income protection worth it for me?
An easy way to test the value of income protection is to look at two things.
1. Think about whether your income is important to you
Australians rely on their income for various ongoing expenses. e.g:
- Mortgage repayments
- Credit card repayments
- Education expenses
When income is taken away, Australians have shown the inability to meet their expenses.
Take the leading causes of missed mortgage repayments for example.
Leading causes of missed mortgage repayments
- Sudden loss of employment was the leading cause (20% of missed repayments)
- Injury (11%) and Illness (10%) were the third and fourth biggest cause (behind simply forgetting!)
2. Consider how income protection can protect you (along with your options)
If you are unable to work due to injury or illness and need to cover your debts you have a few options:
- Your savings. You could draw from your existing savings.
- Mortgage protection insurance. This is a type of insurance purely covers mortgage repayments in the event of major illness or death.
- Income protection. This is a policy that replaces part of your income and can be used to cover mortgage, rent, other debts and ongoing expenses. Note: Income protection also has a range of extra features that come in handy during these moments.
Still not convinced income protection is a worthy investment
The thought of being out of work and having no income can be daunting. Some people even believe that “nothing could possibly happen to me”. As a result, many push income protection to the back of their minds.
However, income protection (also known as salary continuance) has many benefits as it provides financial support if you’re injured on or off the job, and peace of mind knowing your family will be provided for if you’re unable to work.
- Income protection keeps up to 75% of your gross monthly salary coming in until you’re fit to return to work.
Some of the key benefits that income protection can provide include:
- Tax benefits. The ability to make tax deductions with your premium payments.
- Additional benefit to help you recover. Some policies offer additional benefits to help with costs like rehabbing.
Both Income Protection and WorkCover can provide support in the event you suffer an illness or injury though there are key differences to be aware of that make both worth considering.
- WorkCover. A form of workers’ compensation, WorkCover steps in to protect employees when they suffer an injury at their workplace. If an accident at work means you suffer a serious injury and are unable to work for a lengthy period, WorkCover provides compensation. However, your employer’s negligence will need to be proven in order for you to receive a payout, plus you are only covered for injuries incurred at work.
- Income Protection Insurance. Covers you for injuries suffered both at work and outside the workplace, which is very important when you consider that accidents can occur while a person is at home or participating in recreational activities. Income protection also provides cover when you suffer from a wide range of illnesses.
|Cover for injuries and illnesses||WorkCover||Income Protection|
|Outside of work||
Do I need Income Protection if I have life insurance?
If you're working a job then it's foolish to have life insurance but not have Income Protection Insurance. Here's why: Life insurance won't usually payout if you stop working because of injury or illness. Consider how much is your ability to earn income worth to you and how you'd survive without it before sweeping.
Your cash stash could take a hit if you rely on sick leave instead of taking out income protection insurance. Sick leave provides employees with cover for days when they can’t get out of bed or for other illnesses, but the time frame is limited.
IPI covers individuals for a wide range of illnesses and injuries until they’re fit to return to work. Sick leave should be viewed as minimal cover to provide protection for time off.
The key difference between sick leave and Income Protection:
- Sick leave only allows ten days of paid cover for full-time employees, and there is no cover after this time.
- Income Protection covers 75% of your gross monthly income until you return to work.
Another issue when it comes to relying on sick leave is you have to accumulate leave during a year of work. It starts to build up from an employee's first day, and is based on the number of hours they work. The balance does carry over to the next year, but if you use all your leave, you’ll find yourself out of pocket.
With the cover, Germaine was able to take time off and recover.
Case study: How can income protection come in handy during a tough time?
finder.com.au spoke to a 56-year-old legal professional who was able to access Income Protection at her most vulnerable.
Germaine was diagnosed with breast cancer in 2006 forcing her out of the workplace. Being unable to earn any income along with treating her cancer, Germaine was facing an uphill battle.
Luckily for Germaine she had an Income Protection policy that would cover up to 75% of her income. With the cover, Germaine was able to take time off and recover.
Eventually Germaine was able to return to the workforce, part time. Her insurance policy allowed her to switch to a "partial benefit" to cover the days where she is no longer working.
“Your claim can be considered full or partial. Some policies allow you to switch to another based on your ability to claim”
Tips from Germaine
During the claim
- Make sure your claim is backdated to the original date you are diagnosed.
Once you are on cover
- Maintain your relationship with your insurer by doing all they require. “My insurer requires me to see a medical practitioner to maintain my status”
- Be super accurate with updates to avoid putting yourself in "pre-disability" status. “If you don’t provide an insurer with the right information you could find yourself in a situation where you’re not covered.
- Questions are key. Ask lot’s of questions about how your cover works to see how you can customise it.
Any other tips?
Cancer suffers can access their super early. “It’s known as early access. Some funds have different rules for granting this, so make sure you contact your fund.”
How much your Income Protection premium will cost each month depends on the policy and your individual or family circumstances. The policy covers a wide range of illnesses and has the potential to provide benefits for many years. The cost comes down to a number of factors including:
- Your age. As you get older your premiums will rise as it’s more likely you’ll become sick, or sustain an injury in some way.
- Gender. Insurance providers argue women are more prone to taking time off work than men, due to pregnancy and complications. An early retirement statistic also sees females paying higher premiums.
Here are a couple of examples showing fees you might pay for a standard policy, with under AUD$4,000 cover a month and a 30-day waiting period:
- A male doctor could fork out around AUD$450 in an annual premium, while a female doctor would pay AUD$630.
- A female teacher will pay around AUD$200 more than her male counterparts.
- Working in underground mining would see a male pay around AUD$1,200 for his annual premium, while a woman will pay around AUD$1,700.
- Occupation. The more dangerous the job, the more likely an accident will happen. This pushes premiums up.
- Lifestyle choice. Things such as smoking, which can increase the risk of causing serious illness or injury. Smokers can pay as much as double the normal premium under industry standards.
- Medical history and pre-existing conditions. If you have a pre-existing medical condition you’re going to pay a higher premium. This is due to the instant and ongoing financial risk to the insurer. Those in good health will pay standard premiums.
Insurance providers will differ when determining the cost of your insurance premiums. The best advice is to shop around to find the best policy for you.
One of the ways to to maximise your policy and reduce the cost of your cover is to follow these
- Choose your waiting period. The waiting period is the time that must elapse between you suffering your illness or injury and when your policy provides a monthly benefit. Insurers have a range of waiting periods for you to choose from, with the shorter period you choose resulting in higher premiums. If you think you can afford to survive a little longer on your own savings before you need to receive a benefit, select a longer waiting period to lower your premiums.
- Choose your benefit period. The benefit period is the amount of time for which your policy will continue to pay benefits. If you choose a policy with a lengthy benefit period, this will obviously result in higher premiums. However, if you can afford to select a shorter benefit period, know that this will result in cheaper premiums.
- Agreed or indemnity value policy. Income protection policies are offered in agreed value or indemnity value form. Under an agreed value policy, you must provide proof of income when you apply for cover, and the benefit amount you will receive is based on your income at that time. Indemnity value policies, however, require you to provide proof of income when you make a claim. If you have an agreed value policy but your income has risen substantially since you first took out cover, your policy may not be sufficient to meet your financial requirements.
- Stepped or level premiums. Income protection policies are offered with stepped premiums. Stepped premiums will start out lower and increase over time. Level premiums will remain the same over the life of the policy.
- Review your cover. As your life changes and you grow older, your income protection insurance needs change as well. Review your policy regularly to make sure you have the right level of cover in place and that you aren’t paying for policy features you don’t need.
- Quit smoking. Easier said than done but fact is that premiums are lower for non-smokers.
- Tax deductible premiums. Another major drawcard of income protection insurance is that premiums are generally tax-deductible.
As mentioned earlier, you’ll need to decide between an agreed value income protection policy and an indemnity value income protection policy.
- Indemnity value insurance. The most common and usually cheapest policy. Your benefit is adjusted according to changes in your income, at the time you make a claim. This means your benefit could drop if you’re making less money at the time of a claim. You don’t need to show proof of your income until a claim is made.
- Agreed value insurance. The most expensive form of cover, but benefits are fixed on your income at the time you begin the policy. Future changes to your income are not taken into account. This means you will know what your benefit will be before you make a claim.
However, those with fluctuating incomes, for example small business owners and the self-employed, are typically better off with the security offered by an agreed value policy.
If you understand how premiums work, you can find a policy where you pay less in the long term. The main types of premiums are:
- Stepped. This is a premium that rises each year. Stepped premiums typically start off lower and end up higher later on.
- Levelled. This is a premium that stays the same throughout the life of the policy. Levelled premiums tend to start higher than a stepped premium equivalent but end up costing less than a stepped premium later on.
- Hybrid. This is a combination of both stepped and levelled premiums. Hybrids typically start off as a stepped premium then convert to a levelled premium later on.
Income protection expenses are tax deductible, but only relating to premiums paid for your policy. Benefits paid into your account are tax assessable. To claim back on tax, you need to lodge every payment regarding your premiums, and any benefits paid by your fund while you were off work.
Is it deductible through super?
If you’ve taken out income protection insurance through your superannuation fund, you can’t claim this back for tax purposes.
You may wish to consider applying for income protection insurance through superannuation. Rather than reaching into your own pocket and interrupting your day-to-day cash flow to buy cover, income protection through super is funded by your superannuation balance or by your employer contributions. This can make it easier and more affordable for some people to take out some form of protection.
Is it cheaper?
Policies through super are often bought in bulk by the super fund which means you can access a cheaper rate on a standardised policy.
Important drawbacks to note
Some of the main drawbacks of an Income Protection policy through super include:
- It is more difficult to make a claim through your super fund. This is because it's up to the fund’s trustee to determine whether you satisfy the temporary incapacity condition for release of funds before you will receive any benefit.
- Basic level of cover. Policies held through super will typically not provide the same level of tailored cover as policies purchased outside super. This is due to the fact that they are group policies that cannot be designed to meet your specific needs.
- No tax benefits. You are not able to receive any tax deduction benefits for income protection that's held inside a super fund.
IPI is also available for people who are homemakers. Although homemakers don’t draw an income that will need to be replaced, their temporary incapacity to perform their normal duties can place a significant financial strain on any household.
There could be childcare costs to contend with, expensive transport arrangements, and cooking and cleaning services, all of which could come at a sizeable cost. With this in mind, an increasing number of Australian insurers are making income protection cover available to homemakers.
These policies provide a monthly benefit to help ensure the smooth running of your household, covering the cost of cooking, cleaning, childcare and more. If you’re a homemaker and your household would grind to a halt if you were injured or ill for an extended period, this type of cover may be worth considering. John earns $75,000 per year as a construction manager, while Claire’s work as a part-time librarian brings in $30,000 each year. However, when John is involved in a serious car accident and suffers fractured vertebrae, doctors estimate he will be looking at a long recovery that could take up to a year. If John did not have any income protection in place, the cost of meeting mortgage repayments and paying the day-to-day expenses of raising a young family would be simply too much to bear on Claire’s salary. However, John had the forethought to take out an income protection policy which offers a monthly benefit of around $4,700. This enables John and Claire to continue making mortgage repayments and continue to afford all their ongoing expenses. Free from the stress of having to worry about their financial situation, John enjoys a complete recovery and returns to work after 11 months.
John Bender Didn't Forget About Income Protection John Bender and his wife Claire are in their 30s. They live in Sydney’s northwest with their two primary school aged children, and they still have $350,000 left on their mortgage.
John earns $75,000 per year as a construction manager, while Claire’s work as a part-time librarian brings in $30,000 each year. However, when John is involved in a serious car accident and suffers fractured vertebrae, doctors estimate he will be looking at a long recovery that could take up to a year.
If John did not have any income protection in place, the cost of meeting mortgage repayments and paying the day-to-day expenses of raising a young family would be simply too much to bear on Claire’s salary. However, John had the forethought to take out an income protection policy which offers a monthly benefit of around $4,700.
This enables John and Claire to continue making mortgage repayments and continue to afford all their ongoing expenses. Free from the stress of having to worry about their financial situation, John enjoys a complete recovery and returns to work after 11 months.
Income protection insurance is designed to act as a steady source of replacement income when you suffer an illness or injury and are unable to work. To do this, policies typically provide an ongoing monthly benefit that equates to 75% of your regular income. This benefit is paid until you are ready to return to work and start earning money again.
In order to make a claim, you’ll need to provide evidence of your illness or injury to your insurer. The exact evidence you will need to supply differs from one insurer to the next, so speak to your insurance provider for more information.
If you think you would struggle to cope financially if you were unable to work for an extended period, income protection insurance is something you should definitely consider. However, it’s vital that you do your research on the available policies and shop around for one that offers competitive cover at an affordable price.
Ask an Expert