Understanding Income Protection Insurance in Australia
According to statistical evidence thirty three percent of Australians, due to injury and illness, will miss work for three months or more in their entire working life (Source: Insurance actuaries of Australia 2000). Income Protection Insurance offers you a monthly income if you were away from work because of an accident or sickness. It helps you cope with the ongoing expenses like rent, mortgage payments, living expenses, children’s school fees and so on.
What does Income Protection Insurance pay?
Income Protection Insurance generally pays you up to 75% of your income if you are unable to work longer than the waiting period, as outlined in your policy.
What are the different kinds of policies available in Australia?
In Australia you have a choice of mainly three types of policies.
1. Indemnity value
Indemnity Value covers you for a monthly benefit based on your Pre-disability Income, that is the income you earned before the injury or sickness. If your income has reduced, since you took out your policy, your monthly benefit will be reduced to reflect the reduction in income. The Pre-disability Income is proved at claim time by proving your income at claim time.
Indemnity value is relatively cheaper compared to agreed value policies because your monthly benefit could be reduced with the reduction in your income.
2. Agreed value
In agreed value, the monthly benefit or income you will receive at claim time is generally fixed and will not reduce with any future changes to your income.
Agreed value, as the name suggests, is when the benefit is decided at application time itself and not at claim time. During application, your monthly benefit is calculated, based on pre-application income (your income prior to application) and the monthly benefit is an agreed amount. You would only need to provide proof of your income when you first apply for income protection insurance.
3. Guaranteed agreed value
Some insurers have added this term, guaranteed agreed value, in order to validate that your financials are received and on files. This confirms your monthly benefit and thus the name, guaranteed agreed value. However, some insurers still call it Agreed Value.
And, Income Protection Insurance is generally tax deductible
The good news is Income Protection policies are generally tax deductible in Australia, because it protects your income and gives you an income while you are off work. The monthly benefit which is paid as a monthly income will incur tax just like your regular pay, because it is treated as an income.
You can usually claim back the premiums either in part or fully. This depends on whether your policy is a stand-alone or a bundled one. We can provide general information about taxation of Income Protection policies and your tax agent or accountant can answer specific tax questions about how they apply to your circumstances.
Things that affect your premiums, benefits and coverage
Some things to consider while comparing quotes and getting the most competitive option are:
- The waiting period is the time between not working and acquiring the income protection benefit. Generally, it is anywhere between 14 days, one month, three months, six months to a year or two years. Generally, your premiums tend to be higher when the waiting period is shorter and lesser when waiting period is longer. This is because only more severe sickness or accidents keeps you off work beyond the waiting period.
- The type of job you do – The occupational hazards at work affect the cost of your premium. For example a fireman or policeman would pay more premiums compared to someone who works on a grocery checkout or is an office worker. The more risky your job, the higher the premium!
- The length of benefit period – The benefit period is the time you continue to receive your benefit payments and this generally times range from 2 years and 5 years, to the time you reach the age of 55, 60, 65 and no more than 70 years. As you may have guessed: the longer the benefit period, the higher the premium since you get paid more and the insurer covers a greater risk.
- Your choice in policy type – The type of policy you choose determines your premium. If you choose Agreed Value or Guaranteed Value policies, you generally pay around 10% more than if you choose Indemnity Value policy. Depending on which policy suits you: there will times when one type is much more valuable and you are happy to pay the additional price.
- Do You Smoke? – Smokers tend to pay more premiums because of the increased risk to their health. If you have not smoked for last 12 months, you are generally described as a non-smoker for insurance purposes.
- How much you earn – the more you earn, the more premium you will pay because your policy covers a higher income and your benefit will be higher.
- Your age – Premiums tend increase with age. Young people generally pay lesser premiums, because they are considered at lower health risk.
- Male or Female – If you are a woman your income protection premiums are higher and life insurance premiums are less. If you are male your income protection premiums are lesser and life insurance premiums are higher. This is not because of inequality or bias but because independent researches show that women tend to be slightly more susceptible to be absent from work due to health (Source: Bureau of Labour Statistics) and live longer (Source: Psychology today), whereas men tend to take less days off work and have lower life expectancy than their female counterparts.
Who should have an income protection insurance policy?
The simple answer is if you work, you should consider income protection insurance. Premiums are generally tax deductible because the benefits are taxed.
If you have a family and you are the bread winner or sole earner it becomes even more important to consider the additional protection. This protects you in case you do not have sufficient funds during a long period of unemployment due to major illness or accident.
You may have mortgage payments, rent and other day-to-day living costs which you could not pay if you were unable to receive an income from your employment income protection insurance becomes even more important.
Advice on income protection insurance Australia wide
We are happy to answer all your questions. No question is too big or too small and our Life Insurance Direct experts specialise in giving you excellent advice. Our services are absolutely free. Call 1300 882 762 now to discuss your Income Protection policy options.