Life insurance vs Income Protection Insurance

These are some of the questions that determine whether you need life insurance, income protection insurance, or both.

If you work, are married and have children, you can't get by without life insurance. However, if you're single and rent but work full time, income protection insurance could be all you need. Having a look at your life situation is the first step in deciding which type of cover is for you.

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.

• Full breakdown of the 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.

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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, getting life insurance to safeguard their future if anything happens to you is a good idea. Income protection may also be added if you want extra protection in the event of an injury that puts you out of work.

On the other hand if you don't have any dependants and just want to cover your income, then income protection insurance should be considered.

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.

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

• But I already have life insurance inside my super?

  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.

• I already have income protection funded by my employer?

  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.

• But why do I need Income Protection when I have Workers Compensation Insurance?

  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).

• If I am a stay-at-home parent, do I still need life insurance?

  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.

• My income protection insurance features a death benefit, should I still consider a life insurance policy?

  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 pay 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.

Compare income protection or life from these brands

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

• Life insurance
• Income Protection

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Name	Product	Maximum Cover	Maximum Entry Age	Minimum Cover	Terminal Illness Benefit
NobleOak Life Insurance Finder Award		$15,000,000	69	$10,000	$3,000,000	Get Quote View details	Compare	loading Fetching your data...
Real Family Life Cover		$1,000,000	64	$100,000	$1,000,000	Get a refund of 10% of the premiums you've paid (in the first 12 months) with The Real Reward™ .	Get Quote View details	Compare	loading Fetching your data...
Zurich Ezicover Life Insurance		$1,500,000	69	$50,000	$1,500,000	Get the first month free and a 10% discount if you take out a second life insurance policy (discount applies to second policy). T&C’s apply.	Get Quote View details	Compare	loading Fetching your data...
Guardian Life Insurance		$1,500,000	64	$100,000	$1,500,000	Get Quote View details	Compare	loading Fetching your data...
Suncorp Life Protect Insurance		$1,500,000	65	$100,000	$1,500,000	Get 5% off for existing customers.	Get Quote View details	Compare	loading Fetching your data...
AAMI Life Insurance		$1,500,000	65	$100,000	$1,500,000	Get 5% off for existing customers.	Get Quote View details	Compare	loading Fetching your data...
ahm Life Insurance		$1,500,000	65	$100,000	$1,500,000	ahm Health members can save 10% off premiums.	Get Quote View details	Compare	loading Fetching your data...
Medibank Life Insurance		$2,500,000	70	$100,000	$2,500,000	You could win a $1000 EFTPOS gift card when you get a Life Insurance quote by 2 Feb 2021. There’s a winner each week. Plus, Medibank health members save 10% every year. T&Cs apply.	Get Quote View details	Compare	loading Fetching your data...

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Name	Product	Maximum Monthly Benefit	Maximum % of Income Covered	Maximum Benefit Period	Waiting Period Options
AAMI Income Protection		$10,000	75%	5 years	14, 28, 60 or 90 days	AAMI customers save 5% on income protection.	Get quote View details	Compare	loading Fetching your data...
Insuranceline Rate Saver Income Protection		$10,000	85%	5 years	14, 28, 60 or 90 days	Get a $100 bonus gift after 2 months. Plus, and get 12 months cover for the price of 11 if you pay annually. T&Cs apply.	Get quote View details	Compare	loading Fetching your data...
NobleOak Income Protection Finder Award		$25,000	75%	Up to 65	30 or 90 days	Get quote View details	Compare	loading Fetching your data...
Suncorp Income Protection		$10,000	75%	5 years	14, 28, 60 or 90 days	Existing Suncorp customers can get a 5% discount.	Get quote View details	Compare	loading Fetching your data...

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