Find out how life insurance and income protection are different and what is suitable for your situation
Life Insurance and Income Protection are both extremely important types of cover that are designed to give protection for different needs. While the primary purpose of life insurance is to provide support in the form of a lump sum payment following death or terminal illness, income protection provides on ongoing benefit payment to assist injured or ill workers while they are unable to work.
Can I get combined cover?
It is not unusual for people to have both of these types of cover in place; in fact, most insurance advisers would recommend it.
Life Insurance vs Income Protection: The key differences
|Feature||Life Insurance||Income Protection|
|Purpose||Benefit to clear all debts and provide ongoing support e.g. living expenses to financial dependents following the policy owner's death.||Benefit to cover debts and ongoing living expenses while the insured is forced to take time out of work. Can include extra benefit to cover business expenses and rehabilitation.|
|Benefit||Paid as a lump sum upon death or diagnosis of terminal illness of policy owner. Applicant determines benefit at the time of application.||Paid as an ongoing benefit usually monthly in arrears. Benefit is generally 75% of the insured persons regular income though some policies will offer up to 85% if the additional portion is contributed to superannuation.|
|Death Cover||Lump sum provided usually to a maximum of about $1.5 million though some providers will offer unlimited benefit.||Most income protection policies will provide a benefit for death. This is usually 3 - 4 times the insured monthly benefit.|
|Disability Benefit||Available as an additional option. Provides a lump sum if the person becomes totally and permanently disabled.||Provided as a built-in benefit. Insured given an ongoing benefit if they are unable to work due to total or partial disablement. Different definitions of TPD will apply.|
|Maximum Entry Age||Generally about 75 (Some insurers offer cover up to 80).||Generally about 64.|
|Cover Expiry Age||Policy can usually be held until the age of 99||Policy can usually be held till age 65. Some policies will allow an extension of cover to age 70.|
|Tax treatment||Life Insurance||Income Protection|
|Inside Superannuation||Premiums are generally tax-deductible. Benefit payments may be subject to tax as high as 16% if paid to non-dependent.||Premiums are generally not tax deductible. Benefit payment is not recognised as assessable income.|
|Outside Superannuation||Premiums are generally not tax deductible and benefit payments are not assessable.||Premiums are tax deductible but benefit payments are not assessable.|
Is it still worth considering Income Protection if I have Life insurance?
Both life insurance and income protection have been designed for different reasons. One of the primary purposes of life insurance is to provide cover for the policyholder’s family and financial dependents after they have passed away.
Income protection provides additional cover as you live
Income protection essentially being what is known as “living insurance”, providing support to the policy owner and their beneficiaries while they are still alive. It's also valuable for people with no financial dependents that still want to maintain their current standard of living if they are unable to work. Income cover can be a necessary consideration for anyone engaged in full-time work.
Common questions people have when considering Life Insurance and Income Protection in Australia
Combining income protection and life insurance provide you with a joint policy discount
Most Australian Life Insurance companies will offer multi-plan discounts if the policy owner is insured under a number of policies and the discount is usually applied to the premium and excludes stamp duty or policy fees that are applicable. Most insurers will require the policy owner to be paying a certain amount in premium payments each year.
AIA will apply a 12.5% discount for life cover policies if the policy owner has income protection insurance in place and is paying at least $700 or more per year in premium payments for both cover types.