Income protection insurance
[social_share]As the name suggests, Income Protection insurance replaces income lost when a person is unable to work due to unexpected accident or illness.
In the event you meet the definition of Totally Disabled or Partially Disabled, the insurer will pay you all or part of the policy benefit level.
When considering Income Protection insurance , you should take into account the following important information:
Benefit Level
In general most insurers will allow you to insure for up to 75% of your gross income plus an allowance for Superannuation contributions.
Whether you insure for the maximum available benefit depends upon your lifestyle needs. If you’re like most Australians, and spend every dollar you earn, it’s likely you’ll want the highest benefit possible so you can keep making mortgage payments or rent, utility bills, groceries, fuel, education costs, etc.
Waiting Period
The waiting period is the amount of time you must wait before receiving any payment from the insurer. For example, if you have a waiting period of 30 days, you must meet the insurers definition of Totally or Partailly Disabled for 30-days before you receive payment.
The longer the waiting period, the lower the premium you will pay for the policy because the risk to the insurer is less. Common waiting periods are 14, 30, 60, 90 days and 1 and 2 years.
Benefit Period
The benefit period is the amount of time the insurer will continue to pay you as long as you meet the definition of Totally or Partially Disabled. Common benefit periods include 2 years, 5 years, Age 60, Age 65 and Age 70.
Agreed vs Indemnity Benefit Type
When taking out an Income Protection policy, you can choose a benefit type of either Agreed or Indemnity.
An Agreed benefit (the more expensive option) is one that is agreed to at the time of application by providing the insurer with proof of your current income. In the event you make a claim, you will be paid the agreed benefit without being asked to provide additional proof of income.
An Indemnity benefit (the cheaper option) is one that requires you to demonstrate your income at claim time. If at claim time, your income for the past 12 months was lower than the policy benefit level, the insurer will pay you a proportionately lower amount.
Taxation
Yes. Income Protection payments are taxed as regular income.
Because of this, Income Protection premiums are tax deductible, which means the government effectively subsidises the cost of this type of insurance.
How much does Income Protection cost?
Income protection is one of the more expensive types of insurance, because the chances are very high (~ 1 in 3) that you will make a claim during your career.
As mentioned earlier, however, the premiums are tax deductible, which reduces the net impact on your cash flow.
There are also many variables that can be adjusted to help reduce the cost.
How to get Income Protection?
Income Protection policies vary widely, so it’s important to do your homework and choose the cover wisely. An uninformed decision could see you wasting money on a policy that won’t actually work for you when you need it most.
If you would like help getting the best possible cover at the lowest price, complete our online form and one of our personal protection specialists will contact you within 24 hours.
