Life Insurance and Income Protection Insurance: What Cover Do I Need?

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.

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Life Insurance vs Income Protection: The key differences

FeatureLife InsuranceIncome Protection
PurposeBenefit 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.
BenefitPaid 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 CoverLump 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 BenefitAvailable 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 AgeGenerally about 75 (Some insurers offer cover up to 80).Generally about 64.
Cover Expiry AgePolicy can usually be held until the age of 99Policy can usually be held till age 65. Some policies will allow an extension of cover to age 70.
Tax treatmentLife InsuranceIncome Protection
Inside SuperannuationPremiums 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 SuperannuationPremiums 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

Most Australian superannuation funds will offer a default level of life cover to their members. If you are one of these people, it is worth determining how much cover you actually have in your policy and what you stand to receive in the event of a benefit payment. It is rare that the default life cover provided through your superannuation will be enough to cover all of your financial obligations in the event of your death. In addition, standalone policies will usually offer a more comprehensive level of cover as they can be tailored closer towards your needs through additional benefits. Finally, Trauma Insurance is generally not offered through superannuation but can often be bundled with life insurance.

A growing number of Australian employers are beginning to offer income protection insurance to their workers. As these policies are purchased in bulk they are generally more affordable and provide a great means to attract and retain quality workers. While group cover is both affordable and convenient, it may still be worth checking to see if there is an adequate level of cover in place for your situation. For example, pre-existing medical conditions or potentially risky pastimes that you engage in regularly and may not be covered under the group policy.

Workers compensation insurance will only provide cover for illness and injuries that have been sustained at work and while commuting to work (though there are restrictions around this).

Just because you are not the main breadwinner of the family does not mean your loss would not have a significant financial impact. The costs of covering the duties of a homemaker are quite significant and in many way reflects the loss of another income. The cost of hiring someone for childcare, cooking, transport, cleaning and maintenance can run into the hundreds if not thousands of dollars each week.

  • Reduced benefit period for workers compensation of about 13 weeks to 9 years depending on the claim. Income cover can continue to provide cover till age 65.
  • Benefit amounts and benefit periods for workers compensation vary significantly between states. This is not the case for income protection insurance.

In the event that the policy owner suffers a serious illness or injury at work and is eligible to claim both workers compensation and income protection insurance, the benefit paid for workers compensation will be offset against that paid for income protection.

Most income protection policies will offer basic death benefit as a built in feature on the policy. While this is a nice bonus to compare across different policies, the lump sum payment may not be enough to cover all financial obligations in the event of death. Below is an example of what will be provided under the OnePath Income Secure Cover plan.

  • Basic death benefit built-in feature: If the insured dies or is diagnosed with a terminal illness, OnePath will pay a once off lump sum payment of three times the monthly amount insured to a maximum of $60,000. This amount will be paid in addition to any other benefits that the policy owner is entitled to.
  • Enhanced death benefit (only available on the comprehensive and professional plan). Under the enhanced death benefit, One Path will a lump sum payment equal up to six times the monthly benefit to a maximum of $60,000. This will be paid in addition to any other benefits that the policy owner is entitled to.

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.

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William Eve

Will is a personal finance writer for 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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