If your regular income is suddenly stopped due to an accident or illness, and for an extended period of time, it doesn’t take long for financial pressure to build up. Income protection insurance can be a lifeline in this situation, but there are a few other ways to cover your income you'll also want to know about.
What you need to know
Income protection can help to pay your bills and maintain your lifestyle if you can no longer work due to a sudden illness or injury.
It can also offer a number of useful extras, such as a partial disability benefit if you can return to work at a reduced capacity.
This type of insurance typically pays a regular monthly benefit, whereas other types of life insurance tend to offer a lump sum payout.
An easy way to test the value of income protection is to look at two things.
Australians rely on their income for various ongoing expenses. These include:
- Mortgage and car repayments
- household bills such as groceries, Internet and energy
- Credit card repayments
- Education costs for children
When income is taken away, it can prove devastating for any of us. Let's take a look at the leading causes of missed mortgage repayments, which underscores just how key our jobs and wellbeing are to our financial stability.
Leading causes of missed mortgage repayments
A Finder survey of 2,000 Australians asked people why they miss mortgage repayments. The main findings were as follows:
- 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!)
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 that solely 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 your mortgage, rent, other debts and ongoing expenses. Note: Income protection also has a range of extra features that come in handy during these moments.
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Pros and cons of Income Protection: A summary
- Income protection can protect you with payments of up to 70% of your gross monthly salary until you're fit to return to work
- Some policies offer additional benefits to help you back on your feet, such as rehabilitation support. Other benefits of income protection can include childcare benefits and partial disability benefits. The latter can be activated if you return to work in a reduced capacity due to your sickness of injury
- You may be able to enjoy tax deductions with your premium payments, as long as you buy your insurance as a standalone policy. Read more on income protection and tax here.
- This insurance type caps its income replacement benefits – these are generally becoming more restrictive, as our news story explains
- Since the pandemic, many insurers have stopped offering redundancy cover with new income protection policies
- Insurance policies held inside your super won't be tax-deductible, as insurance premiums are deducted from your super contributions.
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|
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 10 days of paid cover for full-time employees, and there is no cover after this time.
- Income Protection typically covers up to 70% 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.
Case study: How can income protection come in handy during a tough time?
Finder 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 lots 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 can I avoid paying too much for income protection?
One of the ways to maximise your policy and reduce the cost of your cover is to consider the following:
- 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 longer 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 to 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 the 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.
I need to make a claim, what benefit am I going to receive?
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 70% 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 ought to 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.
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