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Life insurance vs Income Protection Insurance: What cover do I need?

Find out how life insurance and Income Protection differ and which 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.

What's the difference between the two?

Both can be bought through a life insurer. So what's the difference?

Life insurance

Life cover pays a lump sum to your partner or family members (your nominated beneficiaries) if you die or are diagnosed with a terminal illness.

Income protection

Income protection pays a monthly benefit of up to 75% of your salary for up to two years if you are temporarily unable to work due to illness or injury.

Event coveredDeath by any causeDeath by accidentTerminal illnessAccident or illness that results in:
Cover typeInability to do your job (in the short term)
Life insurance
  • Yes
  • Yes
  • Yes
  • -
Income protection insurance
  • -
  • -
  • -
  • Yes

Get a life insurance or income protection quote

Which product do I need?

Each type of insurance covers a different type of life situation. Life cover provides the promise of long-term financial security for your family in the event that you die, while income protection provides immediate financial assistance if your income stream is interrupted.

Look at your stage in life

Both are vital forms of protection to have, but one may be more important to you than the other, depending on where you are in your life cycle. For example, if you are in the prime of life with a young family and a mortgage and at your highest earning potential, protecting your income could be your first priority.

On the other hand, if you are approaching retirement and have an extended family and a number of assets to your name, ensuring your loved ones are looked after with life cover may be a more important consideration.

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.

Should I combine cover?

Many people who take out life insurance opt for both life cover and income protection and by doing so, protect themselves and their loved ones against both potential life scenarios. If you engage in full-time work then it's a good idea to consider income protection too.

Adding income protection insurance provides additional cover as you live

Having both forms of cover is a way of protecting yourself against all eventualities and ensuring your family will not suffer financial hardship either in the short or the long term:

  • If they fall ill or are injured and are temporarily unable to work. Their lifestyle and family needs are protected with a regular income stream until they recover.
  • If they develop a terminal illness and die. Their family’s long-term needs will be taken care of with a lump sum payment.

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 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.

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.

Example AIA

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.

Life insurance usually offers four types of cover: life cover, trauma insurance, total and permanent disability (TPD) insurance and income protection. Let's take a look at the differences between life cover and income protection and how to decide which is right for your particular life situation.

Some traps to watch for with income protection

Not all income protection policies are the same and these are some of the possible pitfalls to be aware of when comparing insurers:

  • Make sure the policy is index-linked – this means the premiums and insured amount increase each year in line with the Consumer Price Index so your policy keeps pace with inflation.
  • Make sure it has a guaranteed Future Insurability Benefit (FIB) – this allows you to increase your level of cover as needed (usually when you reach a new milestone in life such as a having a child or buying a home) without having to face further underwriting.
  • Make sure it is accessible if held in super – if your cover is through your superannuation, make sure the terms are acceptable (ie waiting periods, benefit periods etc) as these can differ to those in a policy held outside of super.
  • Make sure it uses the “own occupation” rather than “any occupation” definition – try and find a policy that pays out if you are unable to work at your own occupation, rather than at any occupation (which some insurers can use as an argument not to pay a benefit).

Terms to be clear about with life insurance

Two terms you should know when taking out life cover are “binding nomination” and “preferred beneficiary nomination”. These can determine who receives your lump sum payment when you die, so it is important to get them right.

Binding vs preferred beneficiary nomination

A binding nomination is a legally binding statement that declares who you wish your benefit to go to after you die. A preferred or non-binding nomination means the executor of your will decides who receives your lump sum benefit in the absence of a binding nomination.

The advantage of making a binding nomination is that you can be sure your death benefit will be paid in accordance with your wishes. Having a binding nomination in place will also mean a challenge by a disgruntled beneficiary will be less likely to succeed.

Common questions people have when considering Life Insurance and Income Protection in Australia

Compare income protection or life from these brands

You can typically get a combined policy when you go to the providers website.

Name Product Maximum cover Maximum Entry Age Minimum Sum Insured Guaranteed Future Insurability Expiry Age Short Description
$1,000,000
64
$100,000
No
No expiry age as long as premiums are paid
Get a refund of 10% of the premiums you've paid (in the first 12 months) with The Real Reward™.
$15,000,000
69
$0
Yes
99
Get a quote for up to $15 million in life insurance cover. Take out a policy before 31 October 2018 and get your first month free. T&C's apply
$1,500,000
65
$100,000
Yes
No expiry age as long as premiums are paid
Go into the draw to win (1 of 10) $1,000 eftpos gift cards when you get a quote for Medibank Life Insurance. T’s and C’s apply.
$1,500,000
69
$50,000
Yes
99
Receive a 10% discount on the second person when two applications are submitted at the same time, and both policies are issued.
$1,500,000
64
$100,000
No
No expiry age as long as premiums are paid
Cover up to $1.5 million with Guardian Life Insurance.
$1,500,000
69
$0
Yes
99
A simple life insurance product that can offer up to $1,500,000 in a lump sum payment on death or diagnosis of terminal illness.
$1,500,000
65
$3,000
No
80
Protect what matters with a new eligible Virgin Life Insurance policy and you can earn up to 40,000 Velocity Points. Ends 31 October 2018. T&C’s apply.
$1,000,000
65
$100,000
No
No expiry age as long as premiums are paid
Receive one month's premiums off every year if you pay annually upfront. T’s and C’s apply.
$2,000,000
59
$50,000
Yes
99
Get flexible life insurance up to the sum of $2,000,000.

Compare up to 4 providers

Name Product Short Description Maximum Monthly Benefit Maximum % of Income Covered Maximum Benefit Period Waiting Period
Cover up to 75% (to a maximum of $30,000) of your monthly income with NobleOak Income Protection. Take out cover before 31 October 2018 and get your first month free. T&C's apply.
$30,000
75%
2 years or to the age of 65
30 or 90 days
Cover up to 75% of your monthly income if you can’t work due to illness or injury, up to a maximum of $10,000 a month.
$10,000
75%
5 years
30 or 90 days
Go into the draw to win (1 of 10) $1,000 eftpos gift cards when you get a quote for Medibank Income Protection. T’s and C’s apply.
$7,500
75%
5 years
30 or 90 days
Cover up to 75% (to a maximum of $10,000) of your monthly income with Guardian Income Protection.
$10,000
75%
5 years
30 or 90 days
Cover up to 85% (to a maximum of $42,000) of your monthly income with Aspect Income Protection.
$42,000
85%
5 years
14, 30, 60 or 90 days
Receive up to 75% of your income (up to $10,000 per month) if you're unable to work due to serious illness or injury.
$10,000
75%
5 years
30 or 90 days
Protect your lifestyle with a new eligible Virgin Income Protection policy and you can earn up to 40,000 Velocity Points. Ends 31 October 2018. T&Cs apply.

$10,000
85%
5 years
14, 28, 60, or 90 days
Receive up to 30% off in your premiums if you’re in good health and meet BMI qualification tests. T’s and C’s apply.
$10,000
85%
24 months
14 or 28 days

Compare up to 4 providers

Picture: Shutterstock

William Eve

Will is a personal finance writer for finder.com.au specialising in content on insurance. While he cannot give personal advice to clients, Will enjoys explaining the intricacies of different types of protective cover to help individuals and businesses find affordable cover that won't leave them underinsured.

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