Stay financially fit: How Income Protection insurance can help

5-minute read

Income Protection insurance emerges as a potential safeguard, offering a valuable safety net that can provide a partial replacement of lost income in the event that the insured individual is unable to earn due to illness or injury. Discover how Income Protection insurance can contribute to maintaining financial well-being.

The basics of income protection insurance

Income Protection insurance works by providing a replacement income when the insured individual is unable to generate earnings due to injury or illness. Benefits are usually paid as monthly payments representing a portion of pre-disability income. The portion of pre-disability income paid as a monthly benefit will depend on the pre-disability earnings, with most Income Protection policies typically paying a benefit of up to 70%. 

The assessment of the monthly benefit at the time of a claim is determined by factors such as the lesser amount insured and a percentage of the individual's income during the claim period. Depending on the Income Protection policy and/or insurer, the policy may include a contribution to superannuation as well as the benefit paid to the insured.

The monthly benefit is usually paid after a specified waiting period, depending on the policy, with waiting periods often being 30, 60 or 90 days. The benefit is continued to be paid monthly until the insured reaches the policy's maximum benefit period, which may be anything from 2 to 5 years or up to age 65.

Benefits of income protection during illness or injury

The most fundamental benefit of income protection insurance is that it can help the insured continue to receive a portion of their pre-tax income when they are unable to earn an income due to the insured’s illness or injury. Thus, when faced with a situation that prevents the ability to earn an income, the policy can provide an income to support everyday expenses. Below are the key benefits of Income Protection insurance.

Customisable options for Income protection 

Income protection insurance allows the flexibility to tailor the level of protection that suits the personal circumstances of the applicant. It can be customised in some of the following ways:

Waiting period

Premiums for Income Protection insurance may vary based on the selected waiting period. The waiting period refers to the agreed-upon duration after experiencing a disabling injury or illness during which the insured individual must be unable to work before becoming eligible to make a claim and receive benefits. Typically, opting for shorter waiting periods, like 30 days, will result in higher premiums compared to selecting longer waiting periods, such as 90 days or more.

Benefit period

The Benefit Period is the maximum amount of time the person insured can receive a benefit.  Longer benefit periods will generally be more expensive than shorter benefit periods.

Stepped or Level premiums

Premiums are not fixed and can increase. There are two types of premium options - Stepped and Level. Stepped premiums are based on the insured’s age and generally increase at the policy anniversary date each year. Level premiums have the cost of increases associated with age spread over several years and are based on the insured’s age at the policy start date. This means the costs generally start out higher than Stepped premiums, but depending on how long the policy is held for, the cost may be lower at some point in the future. Both types of premiums may also increase if the insurer adjusts its premiums due to market conditions or other factors that may affect the policy including discounts or adjustments for inflation (CPI). 

It's best to compare life insurance policies across various providers to identify the most suitable option based on individual circumstances.

Income protection premiums may be tax deductible

Premiums on Income Protection insurance, where a recurring benefit is paid and when the policy is held outside of the superannuation environment, are generally tax deductible, which can make it a cost-effective option. Check this with an accountant or the ATO to ensure the eligibility criteria.

Less reliance on savings

Without Income Protection insurance one might need to rely on savings to cover expenses during a period of incapacity and reduced earnings. This insurance may help preserve existing savings if the level of cover is sufficient to manage ongoing expenses.

Regular reviews and adjustments

Regularly reassessing income protection policies is crucial to ensuring their continued relevance to individual circumstances. As life situations evolve, policies should adapt accordingly, incorporating modifications to elements such as the waiting period, benefit period, and insured amount to align with changes in one's financial situation.

The differences between income protection and other types of life insurance

Income Protection insurance is designed to replace a portion of one’s income as a monthly payment if the insured is unable to work due to illness or injury. The payout triggers for other types of life insurance maybe death, becoming totally and permanently disabled (TPD) due to illness or injury, losing the ability to work again in one’s own or any occupation, or a diagnosis of a specified critical illness or medical condition (Critical Illness or Trauma).

While Income Protection policies allow customisation through the selection of varied waiting periods, benefit periods, and coverage amounts, alternative life insurance forms are structured to deliver a lump sum benefit—a fixed amount—for a specific event or condition. This format provides less flexibility for tailoring the utilisation of the benefit.

The emphasis on life insurance coverage varies according to the specific type of life insurance. Life insurance offers coverage for beneficiaries in the event of the insured individual's death. Critical Illness (or trauma cover) is structured to offer financial assistance following a diagnosis of a specified critical illness or medical condition. TPD insurance primarily addresses cases where the insured person experiences permanent disability, rendering them unable to work.

It is important to view the relevant Product Disclosure Statement when considering Income Protection insurance.  Find out more by visiting the TAL website.

What is the value of income protection insurance?

Income protection insurance provides a monthly payment which can help support financial well-being and peace of mind when the person insured is unable to earn an income. Whether the income earned is from self-employment or working for a company, Income Protection insurance is an insurance policy that can aid in protecting a financial future and is a key component of a comprehensive financial plan. 

By understanding the basics of Income Protection insurance, an informed decision can be made to ensure that one’s ability to provide an income remains secure, even in challenging times.