Many people take out insurance to protect the things they value most: their health, their home, their car and even their pets. Yet a large proportion of people do not have insurance to cover one of the most valuable things in their life: their ability to earn an income. According to recent statistics, fewer than 1 in 3 Australians has income protection insurance (source Canstar).
Imagine a situation where you were unable to work for a significant period of time, perhaps if you were to become seriously unwell or injured. Most people don’t like to think about the worst-case scenario, but if you were to find yourself unable to work for months or even years, you should ask yourself:
Would you still be able to pay your bills?
Would you and your family feel financially secure?
Could you rely on your savings, your sick leave or your partner’s income to fill the gap until you recovered?
If the answer to these questions is no, then you need to think about having a safety net in place to ensure that you can keep paying your bills, maintaining your lifestyle and looking after yourself and your family. One of the best safety nets available is income protection insurance.
What is Income Protection Insurance?
To put it simply, income protection insurance is a product that will pay you a benefit in the event that you are unable to work due to a serious injury or illness. The benefits paid by your insurer will replace most of the lost income that you would otherwise be earning.
Like all insurance products, income protection comes in different forms and can be adjusted to meet your particular needs and requirements. Most commonly, the benefit will be a monthly payment that is 75% of your normal gross income (before tax). The payments continue until you are able to return to work, or for a fixed period that is agreed with your insurer which will either be 1, 2, or 5 years, or to the age of 65.
It is important to remember that income protection insurance is not the same as involuntary redundancy insurance. Income protection only offers you protection in the event of illness or injury, and not if you are made redundant by your workplace.
Do I need Income Protection Insurance?
Generally, if you rely on the income from your work to meet the cost of living for you or your family and to pay your bills (including mortgage repayments) than it is a good idea to consider income protection.
Even if you do not have children or other dependants, income protection is still very important for you to consider. How would you be able to pay your bills if you were unable to work?
If you are self-employed, a small business owner or you work for a business that relies on the hours you work for its success, income protection may be particularly important for you. In these types of employment, you may not be able to rely on sick or personal leave pay when you are off from work, and you might feel that you have to return to work before you are ready.
Things to consider when taking out Income Protection Insurance policy
How much income protection do you need?
To work out the amount of cover you need, you’ll need to think carefully about your current financial situation and realistically consider your budget and expenses. You’ll also need to think about your future financial goals and plans.
Think about the following questions to get a good picture of your financial situation, and the amount of income protection you’ll need:
- How much are your monthly mortgage, car loan and other personal loan payments?
- How much do you and your dependents need for general living expenses each month – bills, child care, groceries etc?
- Do you have any costs associated with managing any investments?
- Do you have financial goals and plans for the future that do not want to give up if you are unable to work? For example, you might have a fund for your children’s education?
- How large is your savings fund, and how long would you be able to rely on your savings if you were unable to work?
- What does your employer provide for you if you’re off sick or injured?
- Do you have any income protection in your super and if so, how much are you covered for?
Once you have a good overall picture of your finances, you can then start comparing income protection policies to find one that meets your needs.
Is Income Protection Insurance Tax deductible?
The short answer is (generally) yes. Although it will depend on your individual circumstances, income protection premiums are usually tax deductible if you are currently working, so you may be able to claim your premiums back at tax time and save on tax.
Waiting or deferral periods
Income protection policies will usually have a waiting period or an amount of time you need to be kept away from work by illness or injury before you start to receive benefits. This period will be an established number of days that a medical practitioner has certified that you are unable to work.
Usually, the minimum waiting period will be around 30 days. This means, for example, if you had an illness such as the flu, and needed to take a couple of weeks off work, you would be unlikely to receive income protection payments.
You will need to choose an appropriate waiting time when you take out your policy, and generally the shorter that waiting period (and the sooner you wish to receive benefits) the more expensive your policy will be. Waiting periods can range anywhere between a few weeks, to a few years. In order to work out how long a waiting period is appropriate for you; you need to think about how long you could realistically last without your current income.
If you have strong savings and investments, or you are able to take a significant amount of paid leave from your workplace, you might be able to get by for several months without needing a benefit payment. However, if you do not have substantial savings, and you know that your fixed expenses will be quite large (for example if you have hefty mortgage repayments) then you will need to have a shorter waiting period to keep you on your feet.
How your occupation might affect your policy
Your income protection needs might be different depending on the type of work you do.
Different insurers, and different income protection products offer different levels of cover based on their assessment of whether you can return to work after injury or illness. With some insurance policies, once you start receiving benefits the insurer will continue to pay you a benefit until the insurer decides that you are fit to return to any form of work .
However, other policies will offer you income protection for your specific occupation. This means that you will continue to receive benefits will only stop when you return to work at your usual job. This is often a better choice, as it is far less likely you will be unable to do any work then you will be unable to continue working in your usual job.
Income protection is often very important for highly trained professionals, and particularly those who work in the medical profession such as doctors, dentists, nurses and other medical practitioners due to the nature of their work and their exposure to extra risks to their health. It is important to factor these additional risks into your income protection, and look for policies that are tailored to your profession.
Income protection through super
Many superannuation funds will also offer income protection insurance for their members, so it’s a good idea to check if you already have cover and look closely at the policy to see if it meets your needs.
Although there are benefits to having your income protection through super, such as discounted premiums, and the ease of applying for and paying for your premiums, there are also many things that you should carefully consider, such as:
- The level of cover you’re getting – is it too limited for your needs? Will it cover you for a suitable length of time? Is the policy not appropriate for your line of work?
- Most income protection in super will only cover you for a maximum of 2 years. What would you do if you were unable to work long term and your policy stops paying you?
- Will you be able to keep your cover if you change your super account, or your employer stops making contributions?
- Your super balance may be affected as your insurance premiums are automatically deducted from your super.
It’s important to review and compare insurance policies offered by your superannuation fund to policies outside of your super fund if you want to make sure you’re making the right choice.
Stepped and level premiums
When comparing income protection policies, you’ll often be given the choice of stepped or level premiums, so what is the difference?
Level premiums are set at a fixed rate that won’t increase over time (although they may still increase with inflation and additional insurer’s fees). Level premiums will normally be more expensive than stepped premiums, at least when you first take out income insurance, but because they do not increase with your age, it’s easier to plan for your future and control how much you’ll be spending later. Often level premiums will work out cheaper in the long run – after around 8-10 years depending on the insurer.
Stepped premiums will go up each year as you get older but because of this, they will usually be cheaper than level premiums when you first take out the policy. If you are thinking of choosing this option, you need to think realistically about how long you are likely to be paying your premiums. You might save money for a little while, but if your stepped premiums end up much higher than a level premium it might have been wiser to have selected a level premium all along. However, if you think you’re likely to shop around and change policies regularly, stepped premiums might be a good option for you.
Additional features and extras
When looking at and comparing Income protection insurance products, you should always look at the additional extras that some insurers will provide, that might make a big difference if you ever need to claim.
Some policies can include:
- Additional support services for your injury or illness – including rehabilitation services, physiotherapy and retraining to help you recover and get back to work
- Loyalty rewards – which may increase the benefits you will receive the longer you keep your policy
These extras might mean the difference between how quickly your return to work, or how much you pay in premiums over the course of your lifetime, so they are always worth looking at carefully.
When you’re ready to get income protection
If you’ve decided that income protection is a safety net you’d like to have in place, and you’re ready to take out a policy you can talk to one of our helpful financial advisors today to find out the best income protection plan for you.