Income Protection Policy Options in Australia
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What Are Income Protection Policy Options?
Income protection policies are designed to be flexible. Rather than offering a one-size-fits-all solution, insurance providers allow you to customise key features to suit your circumstances.
When taking out a policy, you’ll typically choose:
- Your monthly benefit amount
- Your waiting period
- Your benefit period
- Your premium structure
- Whether to hold cover inside or outside superannuation
- Any optional benefits or add-ons
Each decision influences both the cost of your cover and the level of protection you’ll receive.
Choosing Your Monthly Benefit Amount
Most insurance providers allow you to insure up to 70% of your personal exertion income, broadly, income earned from your own effort or work, after business expenses if you’re self-employed, with some policies also covering an additional amount for superannuation contributions. The maximum amount you can claim is designed to encourage a return to work while still helping you meet your financial commitments.
Note that this percentage may reduce for higher income levels, and insurance providers typically apply a maximum monthly benefit cap regardless of income, check with your insurance provider or adviser for specifics.
When choosing your benefit amount, consider your:
- Mortgage or rent payments
- Household bills and living expenses
- Existing debts
- Childcare and education costs
- Savings and emergency funds
Example: How Much Cover Might You Need?
If your essential monthly expenses total $5,500 and your employer provides limited sick leave, a monthly benefit of around $6,000 may help cover your ongoing costs while allowing for unexpected expenses.
Understanding Waiting Periods
A waiting period is the amount of time you must be unable to work before your income protection payments begin.
Common waiting periods include:
- 14 days
- 30 days
- 60 days
- 90 days
- 180 days
- 365 days
- 730 days
Generally, shorter waiting periods result in higher premiums because benefits start sooner.
Longer waiting periods typically reduce your premiums but require you to rely on savings, sick leave or annual leave before your policy begins paying benefits.
Waiting Period Comparison
| Waiting Period | Premium Impact | Best For |
|---|---|---|
| 14-30 days | Higher | People with limited savings or leave entitlements |
| 60-90 days | Moderate | Employees with some sick leave and an emergency fund |
| 180-730 days | Lower | People with substantial savings or significant leave balances |
Understanding Benefit Periods
A benefit period is the maximum amount of time you’ll receive income protection payments while you’re unable to work. Choosing the right benefit period is about balancing the cost of your premiums with the level of financial protection you need.
Common benefit periods include:
- 2 years
- 5 years
- To age 65
- To age 70
Longer benefit periods generally increase premiums because the insurance provider may need to pay benefits for an extended period.
In general:
- Shorter benefit periods usually have lower premiums but provide cover for a shorter time.
- Longer benefit periods cost more but can provide greater financial security if you’re unable to work for an extended period.
When deciding which option is right for you, consider your financial commitments, savings, occupation, age and how long you could support yourself without an income.
Benefit Period Comparison
| Benefit Period | Premium Impact | Best For |
|---|---|---|
| 2 years | Lower | People with strong savings or lower financial commitments |
| 5 years | Moderate | Families with ongoing expenses and debts |
| To age 65 or 70 | Higher | Primary income earners and self-employed individuals |
Variable Age-Stepped vs Variable Premiums
Most insurance providers offer a choice between variable age-stepped and level premiums.
Variable age-stepped Premiums
variable age-stepped premiums are calculated based on your age each year. They usually start lower but increase as you get older.
Variable premiums
Variable premiums are based primarily on your age when you take out the policy, so they typically cost more initially. They are generally more stable over the long term than variable age-stepped premiums, though they can still rise due to factors like indexation or insurance provider repricing.
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 your retirement savings over time, as premiums are deducted directly from your super balance.
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 can customize their coverage according to their specific requirements, 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, combining these two options provides a balanced approach to safeguarding one’s income and financial security.
Take note that combined structures may provide less overall cover than a standalone self-owned policy, and that the super-funded component still reduces retirement savings over time.
Optional Benefits and Add-Ons
Many income protection policies offer optional benefits that let you tailor your cover to suit your requirements. While these extras usually increase your premium, they can provide additional financial support or flexibility if you’re unable to work due to illness or injury.
The availability and terms of these benefits vary between insurance providers, so it’s important to check the Product Disclosure Statement (PDS).
- Short Waiting Period for Accidental Injury and Critical Illness: Some policies allow you to receive benefits during your waiting period if you’re totally disabled due to an accident or a covered critical illness. Eligibility, payment amounts and exclusions vary by insurance provider.
- Super Contributions Benefit: Allows your insurance provider to continue making superannuation contributions on your behalf while you’re receiving eligible income protection benefits. Payments are made directly into your nominated super fund and are subject to policy limits.
- Indexed Claim Benefit: Automatically increases your monthly benefit while you’re on claim to help keep pace with inflation. The annual increase is generally linked to CPI or another rate specified in your policy.
- Booster Option: Provides a temporary increase to your monthly benefit if you’re totally or partially disabled. Depending on the policy, the additional benefit may be available for up to six months.
Take Note: Not all insurance providers offer the same optional benefits, so it’s important to compare policies carefully.
Unique Built-In Benefits
Many income protection policies include built-in benefits at no additional cost. While these features vary between insurance providers, they can provide extra financial support, flexibility and assistance during your recovery. That’s why it’s important to compare more than just the premium when choosing a policy.
Depending on the insurance provider, built-in benefits may include recurrent disability benefits, rehabilitation support, benefit indexation to help keep pace with inflation, salary increase benefits and cover for certain occupation-specific events, such as needlestick injuries for eligible medical professionals. Always check the Product Disclosure Statement (PDS) to understand what’s included and any terms, conditions or exclusions that apply.
Frequently Asked Questions and Answers
Are income protection premiums tax-deductible?
Premiums for income protection policies held outside superannuation are generally tax-deductible. Different rules may apply to policies held through super.Are income protection payments taxable?
Yes. Income protection benefits are generally treated as assessable income and may be subject to tax.Can I change my policy options later?
Many insurance providers allow you to adjust your cover, although changes may require additional underwriting or affect your premiums.Can I hold income protection inside and outside super?
Yes. Some people choose a split ownership structure or hold separate policies to balance flexibility, tax considerations and affordability.What happens if I’m self-employed?
Income protection can be especially valuable for self-employed people because they may not have access to sick leave or employer benefits. Some insurance providers also offer business expenses cover.
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