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Income Protection Insurance

If you have a family or ongoing financial obligation, such as mortgage payments, rent, groceries or school fees, and rely on your salary to support you, then you might need income protection insurance.

Income protection is an insurance policy that will pay you a gross monthly benefit of up to 75% of your regular income, in the event you are unable to work due to sickness or injury for longer than your waiting period. This benefit payment continues until you reach your maximum benefit period or until you’re able to return to work.

This benefit can help you cope with ongoing expenses, so you can focus on recovering and getting back to work.

We have put together a step-by-step guide to help you find affordable income protection in Australia

Average future earning potential for Australians

Your income tends to grow as you mature and gain work experience, usually reaching its peak when you near retirement age. Imagine what would happen if you were unable to work because of an illness or injury while you’re still young.

Your ability to generate an income is generally your greatest asset. Unless you are independently wealthy, you need your income to pay your mortgage, repay debts, fund your retirement and maintain your current standard of living.

How your income increases as you age

Source: Australian Bureau of Statistics Earnings in All Jobs (updated May 2017)

Who should consider getting an income protection insurance policy?

If you have a family, are paying a mortgage and have other ongoing obligations and debts, then you should consider an income protection policy. This protects you in case you do not have enough funds during a long period of unemployment due to significant illness or accident. Being off work and unable to make these payments may put you and your family in a weak financial position.

People typically consider income protection insurance when:

What is a benefit period and waiting period?

Different types of income protection insurance

Indemnity Value

Indemnity Value covers you for a monthly benefit based on the lessor of your insured monthly benefit and 75% of your pre-disability income, that is the income you earned before the injury or sickness. Therefore, 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.

Indemnity Value is relatively cheaper compared to Agreed Value policies because your monthly benefit could be reduced with the reduction in your income at claim time.

Agreed Value

In Agreed Value policies, 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 monthly benefit is agreed at application time and not at claim time. During application, your monthly benefit is calculated, based on pre-application income (your income before applying) and the monthly benefit is the agreed amount. You would need to provide proof of your income when you first apply for cover.

Guaranteed Agreed Value is the term some insurer’s use to validate that your financials are received and on file. This confirms your monthly benefit and thus the name guaranteed agreed value. However, some insurers still call it Agreed Value.

Minimum working hours to be eligible for income protection cover

Generally, to be eligible for income protection, you must be working for a minimum of 20 hours per week in a Gainful Occupation.

If you do not meet the minimum working requirements, then feel free to contact our team and ask them to conduct a Pre-Assessment, to determine what options may be available to you from the panel of insurers we have access to.

Factors that affect your premiums

Some things to consider when making an income protection insurance comparison and searching for the most competitive prices, include:

1. Your monthly benefit

The higher your monthly benefit is, the more expensive your premiums will be.

2. Your choice of waiting period

Insurers generally offer you a selection of waiting periods – the time between becoming totally disabled and unable to work and when you start accruing your monthly benefit. Usually, it is anywhere between 14 days, one month, three months, six months to a year or two years.

Typically, your premiums tend to be higher when the waiting period is shorter because a claim can potentially be paid for less severe sicknesses or accidents. For example, a claim could be paid for a broken leg if you had a waiting period of 14 days but might not be paid if you had a 90-day waiting period because your leg might have healed by then.

3. Choice of benefit period

Flexible benefit periods options are available to suit your requirements and budget. The benefit period is the maximum amount of time you continue to receive your benefit payments, and it generally ranges from 2 years and 5 years or up your age 55, 65 or 70, depending on the insurer.

The longer your benefit period, the higher your premium will generally be, since you potentially get paid for a longer period and the insurer covers a higher risk.

4. Your occupation

The occupational hazards at work affect the cost of your premium. For example, a firefighter or policeman would pay more in premiums compared to someone who works on a grocery checkout or in an office. Generally, the riskier your job, the higher the premium will be.

5. Built-in benefits

Some policies might be more expensive because they include a broader range built-in benefits, while others might be cheaper because their offering is more basic. Examples of built-in benefits offered by select insurers include:

6. Optional extras

You can enhance your policy with additional policy options to give yourself greater cover. These generally come with a higher premium.

7. Choice of policy type

The type of policy you choose will generally affect your premiums. If you choose Agreed Value or Guaranteed Value policies, you pay typically around 20% more than if you chose an Indemnity Value policy.

8. Smoking Status

Smokers tend to pay more premiums because of the increased risk to their health. If you have not smoked for the last 12 months, you are generally described as a non-smoker for insurance purposes.

9. Your age

Premiums tend to increase with age. Young people generally pay lesser in premiums because they are considered a lower health risk.

10. Gender

Generally, women tend to pay higher income protection premiums compared to men because women usually make more income protection claims.

The premium you pay on income protection insurance is generally tax deductible. So, at the end of the year, you can claim 100% of this as an expense. However, you cannot claim a deduction for a premium or any part of a premium where the income protection policy is taken out through your superannuation and insurance premiums are deducted from your super fund. It would generally become a deductible expense to the Superfund, and not to you.

You can claim income protection premiums as a tax deduction when you lodge your tax return. Your life insurance company should inform you of the amount of premiums you have paid towards your income protection policy in a premium statement which is sent out in July of each year. If you do not have this document, make sure you contact your life insurer before you submit your tax return.

**Based on a 30-year-old, non-smoking male admin clerk, living in NSW, purchasing $75,000 worth of annual income for Indemnity Income Protection Insurance as at 21 November 2019 (stepped premiums).