Customise Your Income Protection Policy

Structure your income protection policy to work harder for you. Each policy option comes with unique features, benefits, and limitations. To make an informed decision, it’s important to examine and compare various income protection policy options. This will help you choose the right coverage level and ensure you have financial support when you need it most.

Published July 21, 2023

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Understanding Income Protection Policies

Income protection policies are insurance plans designed to help you meet your financial obligations and maintain your standard of living during challenging times. You become eligible for a monthly benefit if you cannot return to work due to illness or injury after your waiting period has ended. This benefit is typically a percentage of your pre-claim income, commonly up to 70%. The exact amount varies depending on the policy and insurer.

The monthly benefit is typically a regular payment that helps cover your essential expenses, such as mortgage or rent payments, utility bills, groceries, and other financial obligations. It could provide a source of income during your recovery period, allowing you to focus on your health.

Monthly Benefits

The monthly benefit is the maximum amount you can  receive from your income protection policy every month when you cannot work due to illness or injury. It is generally the lessor of the sum insured (monthly benefit) or a percentage of your pre-claim income, often up to 70%. This ensures that you have a portion of your income replaced, enabling you to maintain financial stability when you can’t work.

Premiums based on the monthly benefit

Source 1*

Benefit Periods

The benefit period refers to the maximum period you may receive the monthly benefit payments if you cannot work, and continue to meet the eligibility criteria. It varies across different policies and can range from a 1 year to several years. When choosing an income protection policy, it is essential to consider the benefit period that aligns with your requirements (financial obligations).

Longer benefit periods provide extended coverage, ensuring you have financial support for an extended duration. However, longer benefit periods may also result in higher premiums. Assessing your short and long-term financial obligations, the nature of your occupation, and budget to determine the appropriate benefit period for your policy.

Case study

This case study examines the income protection needs of a 35-year-old male accounts clerk in New South Wales (NSW), who earns $85,714 per year and does not smoke. The study compares four different benefit periods: 2 years, 5 years, until the age of 65, and until the age of 70. The objective is to determine the most suitable benefit period that provides optimal coverage for the individual’s income protection.

Policy2 year benefit5 year benefitTo Age 65To Age 70
NEOS Protection Income Support Standard$39.66$44.24$69.11N/A
Clearview ClearChoice
Income Protection (IP60)
$46.15$48.79$80.28N/A
TAL Accelerated Protection
Income Protection Focus – Short BP (Health Sense discount)
$49.36$53.57$89.89N/A
MetLife Protect
Income Cover (Healthy Lives)
$49.78$57.58$97.80N/A
AIA Priority Protection
Income Protection CORE – Flat 70%
$52.46$68.36$125.99N/A
OnePath OneCare
Income Secure Protection
$54.22$67.05$91.76N/A
Zurich Wealth Protection
Income Safeguard
$54.86$73.68$97.32N/A
MLC Insurance
Income Assure (Vivo Incentive)
$57.50$78.17$108.13$118.93

Source 2*

Waiting periods

Waiting periods in income protection refer to the duration that an individual must be unable to work before they become eligible to receive benefits. These waiting periods can vary depending on the insurance policy, ranging anywhere from 14 days to 730 days. During this waiting period, individuals are not entitled to receive any income protection benefits, even if they cannot work due to illness, injury, or disability. The purpose of the waiting period is to ensure that the insurance policy covers long-term and significant loss of income rather than temporary or minor disruptions.

Premiums based on your waiting period

Source 3*

Paid Policy Options

In addition to selecting the basic components of an income protection policy, such as waiting periods and benefit periods, you can further customise your coverage by choosing from various policy options. These options allow you to enhance your policy and ensure it aligns with your needs. Consider the following income protection policy options:

Stepped vs Level premiums

You can choose between stepped and level premiums when considering income protection insurance. Stepped premiums are initially lower but increase as you age, making them more costly in the long run. On the other hand, level premiums may remain consistent over time as they typically don’t increase due to age, offering a predictable financial plan as you won’t be affected by age-related increases.

However, it’s essential to note that level premiums can still change due to factors such as adjustments by the life company in base rates, alterations in stamp duty, policy fees, changes in the sum insured (e.g., increased coverage by CPI), or reductions in health life discounts. So, while level premiums provide financial stability in the short term, external factors may cause fluctuations over time. Make sure to carefully assess both options’ pros and cons before deciding.

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Funding Your Income Protection Policy

When setting up your income protection policy, you have several options for funding it. The choice of funding method can have implications for your control over the policy, the tax deductibility of premiums, and the advantages and disadvantages associated with each approach. Consider the following funding options:

Self-Owned Policy

Opting for a self-owned policy means you have complete control over your terms and conditions. This includes selecting the desired benefit amount, benefit period, and waiting period. As the policy owner, you have access to all ancillary benefits and the full range of benefits. One of the potential advantages of a self-owned policy is that premiums are generally tax-deductible at your marginal tax rate, providing potential tax benefits.

Income Protection Through Superannuation

Another option is to obtain income protection coverage through your superannuation fund. In this scenario, the fund may act as the policy owner if it offers a group policy, or the retail superannuation trustee can hold the policy with premiums paid or rolled over from your existing super fund. The disadvantage includes the eligibility to claim on the policy. You need to meet both the policy terms and conditions and a condition of release under the SIS legislation. Secondly, while funding your policy through super assists with cash flow, it erodes.

Split income protection

Split income protection is a unique and advantageous combination of a self-owned policy and income protection through superannuation. With a self-owned policy, individuals have the freedom to customize their coverage according to their specific needs, including benefit amount, period, and waiting period. Moreover, they can access all ancillary benefits and enjoy potential tax benefits as premiums are tax-deductible at their marginal tax rate.

On the other hand, income protection through superannuation allows policyholders to use their super fund to pay for the premiums, improving cash flow. However, it comes with certain limitations, as eligibility to claim on the policy requires meeting both policy terms and conditions and a condition of release under the SIS legislation, which may restrict some individuals. Despite this drawback, the combination of these two options provides a balanced approach to safeguarding one’s income and financial security.

Frequently Asked Questions and Answers

  • Are income protection premiums tax-deductible in Australia?

    In most cases, income protection insurance premiums are tax deductible in Australia. However, it’s always recommended to consult with a tax professional or refer to the Australian Taxation Office (ATO) guidelines for specific details and eligibility criteria.
  • How long does the waiting period typically last before I can start receiving income protection benefits?

    The waiting period for income protection policies in Australia can vary, but it commonly ranges from 30 to 90 days. It’s important to understand that benefits typically are then paid in areas, e.g.: if you had a 30 day waiting period you would typically receive your monthly benefit on day 60.
  • Can I have multiple income protection policies to increase my coverage?

    Yes, it is possible to have multiple income protection policies in Australia. However, typically these should not provide a more than a maximum total benefit of up to 70% of your pre-claims earnings. Therefore you may have one policy that has a 2 year benefit period, and the second one that has a 2 year wait and a benefit period to age 65 or overlaps.
  • Do income protection policies cover pre-existing medical conditions?

    Coverage for pre-existing medical conditions can vary among insurers and policies. Some policies may exclude coverage for pre-existing conditions, while others may provide coverage after a waiting period or with certain limitations. It’s crucial to disclose any pre-existing conditions when applying for an income protection policy and thoroughly review the insurer’s policy terms regarding pre-existing medical conditions.
  • Can I make changes to my income protection policy after purchasing it?

    Changing your income protection policy after purchasing it is often possible, such as adjusting the benefit amount or adding optional policy options. However, any changes may be subject to the insurer’s terms and conditions, including potential underwriting and approval processes. Contact your insurance provider to discuss the options and procedures for modifying your policy.

Sources

  • Source 1: Life Insurance Direct Comparison Engine (July 2023; Premium estimates for a 35-year-old male living in NSW who works as an accounts clerk, with a 30 day waiting period, and 2 year benefit period, premiums with a $2,000 monthly benefit from MLC Insurance Income Assure +policy other premium estimates for monthly benefits with a Income Support Standard policy from NEOS Protection)
  • Source 2: Life Insurance Direct Comparison Engine (July 2023; Premium estimates for a 35-year-old non-smoking male living in NSW who works as an Accounts Clerk and earns an annual salary of $85,714 annually on a policy with a 30-day waiting period and benefit periods of 2 years, 5 years, to age 65 and to age 70)
  • Source 3: Life Insurance Direct Comparison Engine (July 2023; Premium estimates for a 35-year-old male living in NSW who works as an accounts clerk and earns an annual salary of $85,714 annually with a MLC Insurance Income Assure (Vivo Incentive) policy)

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